An auto loan is an auto loan, right? Not so fast! Believe it or not, there are several kinds of loans that you might consider when you go to buy a new, or new to you, vehicle. And there are more sources for loans than in the past. So how do you choose? We’ve got some strategies to consider when you are looking at how to finance your new ride.
How to Finance a Car: Comparing Your Loan Options
In general, borrowers get auto loans from a financial institution (a direct auto loan) or from a dealership (often called an indirect auto loan). Your credit union is likely to give you the most personalized service, like pre-approval, assistance with specific questions or concerns, and possibly even special programs for groups like military or veterans. Banks and online lenders may also offer pre-approval but may not offer special programs or personalized service. If you apply with more than one lender, do so within a couple weeks to minimize impact to your credit score. For any offer you accept, you'll get a pre-approval letter stating how much you can borrow and the interest rate which you can take with you when you shop for your vehicle.
Dealership financing may be through financial institutions they have a relationship with, or it may be through a financing agency that works specifically with the brand they represent. Either way, the dealership arranges the financing, and most often earns a consideration for securing loans. It is to their benefit if you get your financing through them, so they will often be extremely enthusiastic about their terms and incentives. Putting their terms through a loan calculator can help you compare their offer to your pre-approved loan. You can even do this on your mobile device.
What Type of Auto Loan Is Best for Your Situation?
The most common type of loan used to purchase a vehicle is the secured auto loan. This loan uses the vehicle being purchased as collateral, which means the lender can repossess the vehicle if you fall behind on payments. As a secured loan, new and used auto loans are usually easier to qualify for and offer the best rates, but lenders will usually require you to keep comprehensive auto insurance on the vehicle.
While less common, using an unsecured personal loan to purchase a vehicle is possible. The advantage of using a personal loan is there is no lien on the vehicle, a down payment is not usually necessary, and you can choose whether to buy comprehensive or simple liability coverage for the vehicle. While an unsecured loan can also be a great way to buy a car from an individual, it can be harder to qualify for and will usually have a higher interest rate. This loan type is usually more of an option for a used auto purchase because the loan amount is typically lower than for a new auto.
If you don’t know for certain which type of loan is right for you, it should become clearer as you shop around.
How Do I Choose the Right Auto Loan?
The best way to choose the right auto loan is to get pre-approved before you shop for a vehicle. Reviewing current auto loan rates and financing options before visiting a dealership can help you negotiate with confidence. This gives you the ability to research your loan options as carefully as you research your vehicle choices. Whether you choose a traditional auto loan, dealer financing, or an unsecured personal loan can only be answered with confidence when you have actual offers from lenders.
Comparing these offers should include more than the rate. Be sure to look at:
Term – How long will you be paying for the vehicle. Is it best to go with the shortest term you can afford to keep the total cost down?
Monthly payment – Be sure to compare payment at the same term for all lenders.
Rate – What is the best rate you can get at the shortest term you can afford?
Total financed – How does each offer compare when any applicable fees are added to the loan?
Total cost of the loan – Which loan comes out ahead when you compare the total cost for each loan option after you add up the down payment, loan principal and interest?
Remember, even if you present a pre-approval letter, auto dealers may try to encourage you to fill out paperwork to finance the vehicle through them at the time of purchase. But be aware, most often they would be sending your loan out to a third-party for the actual financing. But when you have pre-approval from a lender, you negotiate from effectively the same position as a cash buyer. Since you are not relying on the dealer to finance the purchase, you can concentrate on getting the best price for the vehicle.
Asking questions and planning your loan before you actively look for a vehicle takes one of the most stressful features of car shopping and makes it your superpower.
