In 2017, 107 million Americans had car loans. The number of people choosing to finance has grown in recent years, even as interest rates go up. What is financing? For most people, it’s the only way to buy a new vehicle. Our guide will show you more about this option and whether it might be the right choice for you.
What is Financing?
You’ve probably heard someone talk about financing their car. You may have even seen ads on TV or on a website talking about great deals on financing. What does finance mean in this situation? Your friend is actually talking about taking out an auto loan to buy a new vehicle.
The Fundamentals of Car Loans
An auto loan is almost like any other loan: you apply for the amount you need. If the lender approves your application, you receive the money. Like other loans, a car loan comes with terms and conditions. Most loans charge interest. Almost all have penalties if you miss a payment. Loans are structured to be paid back in installments. Often this will be a monthly payment. It could also be a bi-weekly or even weekly payment. Auto loans are paid back over a period of years. Your interest rate is locked in during this time, so it won’t change.
How to Get a Car Loan
Few of us have $10,000 or $20,000 just lying around. A car loan can put a new car in reach. Where can you get a loan for your next car? You have a few options. Banks and other financial institutions offer car loans. Some consumers don’t qualify, however. You’ll need to have a good credit rating. If you don’t qualify for an auto loan with your bank or you have bad credit, you’re not out of options yet. Many dealers also offer financing. Some offer subprime auto loans, which are available to those with bad credit. If you don’t have a credit history, you may still qualify for a subprime loan.
Down Payments, Interest Rates, and Loan Terms
When you apply for a loan, you must provide the lender quite a bit of information. You’ll likely need to negotiate on the loan amount, the interest rate, and the length of time for the loan. If you’re planning to buy a new vehicle, a loan specialist can help create a repayment plan that works for you. Remember, you have to pay the auto loan back, so you want to make sure the payments are manageable. You can make payments more manageable by taking out a smaller loan. If you have some funds of your own to put toward buying the car, you can use these as a down payment. You may also be able to stretch the payment period out over a longer time. Most car loans are between two and five years, but some lenders will offer seven years. Finally, the interest rate can also make the car more or less affordable. A high-interest rate will increase your monthly payments. Subprime loans usually come with higher interest rates.
What Lenders Consider
What information will lenders need when you apply for a loan? You’ll need to provide:
· Employment information
· Annual income
· Information about other debts
· A credit report
Lenders consider the applicant as a whole person, so they’ll even want to know if you’re single or married. This helps them determine if you’re likely to be able to pay back the loan.
Shop Around for the Best Deal
If you’re considering a loan for your next auto purchase, don’t make the mistake of picking the first lender. You can shop around to find the best deal for your loan. If you have no credit history or bad credit, you’ll have more limited options but you should still ask more than one lender about loan options. One lender may be willing to loan you more, while another may have a better interest rate. Finding a loan that works for your budget should be your top priority.
Protecting Your Purchase
Auto financing is a great idea if you can’t afford to buy a vehicle on your own. But what happens if you get into an accident? You’ll want the right insurance. Insurance can help you cover the costs of getting a new vehicle. If you still have an amount owed on your loan, you may be able to cover it with the insurance payment. Another good choice is insuring the loan itself. If the vehicle is damaged beyond repair in an accident or fire, insurance may cover the loan. Insurance may also help repay the loan if you happen to become sick or disabled. What happens if the car you buy with your auto loan turns out to be no good? You should consider protection designed for this situation. If the car you buy turns out to be a lemon, a contract could save you thousands in attorney fees and more.
Learn More Before You Buy
Now you’ve answered the question, “What is financing?” and you have a working auto loans definition. What else should you know before you buy your next car? On our blog, you’ll find plenty of car shopping advice so you can get the best deal with your next car. You’ll also find more about how you can protect your investment. Buying a car doesn’t need to be stressful.