If you are planning to buy a car for the first time, there are processes that you should know and have to go through. If you have sufficient funds enough – but not enough to allow you to pay for a brand-new car in full – then the alternative is to get a good loan for your car financing. In other words, get a good car loan.
What is a car loan?
A car loan simply means a personal loan that allows the potential buyer to pay the car off in monthly installments, instead of having to pay the vehicle’s full price in a lump sum. In a car loan situation, the lender (usually a bank or a lending institution) pays the borrower’s car of full, and in return the borrower has to pay off his debt by monthly payments, plus interest fee.
A car loan may be in the form of a secured loan or an unsecured loan depending on the situation. But most of the time, banks and other lending institutions tend to offer a secured loan particularly to borrowers with a bad credit rating. That’s because secured loans are usually backed by a collateral. Which means that if the borrower fails to pay off his debt, he could lose his car to the lender as a payout to that debt. But the upside of the secured loan for the borrower is the relatively low interest rates that it offers.
As for the unsecured loan, it is not backed by a collateral and it’s typically offered to borrowers with a very good credit score. However, an unsecured loan usually has higher interest rates. In order to maintain their good credit standing, borrowers must do their monthly payments on time.
Yes, the process for getting a car loan – and eventually repaying it – can be quite a pain in the neck. Most Americans, unfortunately, are struggling to pay off their debts on time.
To avoid falling in the same predicament, one of the solutions is utterly simple: buy a car that your budget can afford. That way, you won’t suffer delinquencies in your payments or worse, have your car re-possessed.
There are other ways to help you in getting the best financing for your new auto:
1) Get your credit report and check it.
You can obtain your credit report from reputable major credit reporting agencies such as Equifax, Experian andTransUnion. You can also go to the federal-sponsored website annualcreditreport.com to check your credit report. This way, you will know which of the three agencies the lenders will use and this will give you time to straighten things out in relation to your credit standing. It prevents you from costing you a lot more money.
2) Check your credit rating.
Checking your credit rating will give you an idea whether you are qualified for a car loan. Once you are qualified, you will be then offered interest rates, depending on your credit rating.
3) Look for the best rate
People may shop around for the best car, but most of them do not bother to shop for the best auto loan – and perhaps this is one of biggest mistakes that most car buyers would commit. Do not just get lured by the ads that promise attractive interest rates – these incredibly low rates are only geared towards clients with a very high credit rating. Doing your own homework and research first will enable you to shop for the best rate possible.
Credit unions are one of the best places to start because they offer the most attractive rates on car loans. Community banks also offer the best rates as well.
4) Keep your loans as short as possible.
Car dealers extend the loan term beyond the standard maximum loan term. That’s their ruse in order to allow borrowers to lower their monthly payments. The term may be extended to as long as seven years, which sounds ridiculous. A car is an asset whose value depreciates as years go by, and stretching the loan term will put you at the losing end.
The most ideal loan term is four years, while the maximum loan term is five years. If you are still financing your car for more than five years, you could find yourself with an “upside car loan” which simply means that you presently owe your lender more than what the vehicle is currently worth. Because of this, you’d end up paying more than you should. You could avoid that situation by choosing the shortest loan term possible – ideally, four years or less.
5) Turn down those “add-ons.”
Car dealers are eagerly pitching you with attractive “extra” options such as GAP protection insurance, fabric protection, rustproofing, shield protection, car alarms, VIN etching, extended warranties and many other add-on products and services. Unless your car really needs any of these, skip them. While many of these extra products and services are useful, dealer markups can be incredibly high.
You can get those extra products and services elsewhere at a cheaper price. Most newer cars no longer need rustproofing and undercoating – most automakers have the corrosion-perforation warranty on their own vehicles. If a third party does the additional rustproofing or undercoating, that warranty is automatically voided. As for the GAP protection insurance, most credit unions offer them at a lower price. These aftermarket options will definitely save you a lot of bucks.