Outside of housing and education, buying a car is one of the most significant purchases a person can make. Your car is one of your most important, valuable tools; you need a sturdy, reliable vehicle for work, travel, errands, and other transportation needs.
For most people, buying a car is a challenging financial decision. Getting the money to purchase a car is typically done via a loan. There are several ways to get a car loan, but how do you get the best possible loan?
Start With Pre Approval
Getting pre-approved for a car loan can be an intelligent move when shopping for a vehicle. It can help you determine how much you can afford to spend and give you more negotiating power when you're at the dealership. To get pre-approved, you must look for lenders that offer favorable loan terms. You will need to fill out an application for pre-approval. This typically involves providing basic personal and financial information, such as your income and employment history.
You should not need to know the make or model of your potential new car for loan pre-approval; however, you will need to see if you want to buy a new or a used car. Loans for car buying offer different interest rates based on whether or not you buy a new one.
After the lender reviews your application and credit score, they may pre-approve you. If they do, they will give you a loan offer, which you do not have to commit to. Instead, you can use this pre-approval to shop for a car and negotiate with dealers.
It's important to note that pre-approval does not guarantee you'll be approved for a loan. Once you've chosen a vehicle and submitted a loan application, the lender will review your materials again to determine whether to approve you for the loan. However, getting pre-approved can help you streamline the car-buying process and find the best auto loan available.
Choosing Auto Loans
Choosing an auto loan can be a daunting task. It would help if you looked at several different options and types of loans before deciding on one. You will be paying this loan for quite some time, so find one with terms and conditions that you can deal with for years to come.
Interest rates can vary widely between different lenders and types of loans. Interest rates will either be fixed or variable, and the current state of the market will influence what type is the better choice. You want to choose a loan with the lowest possible interest rate.
Some lenders will offer promotional rates, including 0% interest rates. These rates are designed to attract borrowers and may come with more restrictive conditions. The promotional rate may be offered on only certain vehicles, for example. If you want to qualify for a 0% rate, you must have a high credit score.
You should be prepared to shop around and negotiate. You should not feel pressured to take the first terms offered to you. Compare promotional rates across lenders and negotiate for better terms. If you have a high credit score and can provide proof of income, a lender will be more willing to negotiate with you.
According to the Experian State of the Automotive Finance Market Q3 2022 report, the average interest rate for new car loans in 2022 was 3.84% for car buyers with credit scores of 781 to 850, while shoppers with a credit score of 300 to 500 had an average interest rate of 12.93%. For used car loans, the difference was even more significant; the highest credit score category was offered an average rate of 3.69%, while the 300 to 500 credit score buyers were offered an average interest rate of 19.81%.
The length of the loan and the size of your monthly payments will vary depending on the loan. Consider how long you want to make payments and what you can afford each month. Some lenders offer better promotional rates for shorter-term loans. A short-term loan can save you money in the long run if you can afford a higher monthly payment. Generally speaking, it is best to take the shortest-term loan. Your monthly payment will be higher, but you can save thousands of dollars on interest.
Fees and Charges
Most auto loans are more complex than lending and then paying back money. Look for any additional fees or charges associated with the loan, such as origination fees, prepayment penalties, or late fees. These can add up over time and increase the overall cost of the loan. Loans may also have an expensive application fee; these may be waived as part of a promotion, or you can look for a lender that does not charge an application fee.
Types of Auto Loans
In addition to varied loan terms and conditions, there are various auto loan types. Each type has advantages and disadvantages.
Secured auto loans are backed by collateral, usually the vehicle you purchase. If you default on the loan, the lender can repossess the vehicle to recoup their losses. These loans typically have lower interest rates and longer repayment terms, making them a popular choice for those with low credit scores.
Unsecured auto loans are not backed by collateral. This means that if you default on the loan, the lender has no collateral to repossess. These loans typically have higher interest rates but come with shorter repayment terms. They are usually a good choice if you have a high credit score.
Dealer financing is a loan that is offered through the dealership where you are purchasing your car. This financing can be convenient since you can often complete the loan application and buy the vehicle in one visit. However, dealer financing can also be more expensive than other types of loans, as dealers may add additional fees or markups to the loan. Promotional interest rates and other incentives can reduce these costs; these loans are highly variable and can even be negotiated. This can be a good or terrible option; it depends on what the dealer can offer.
Personal loans can also be used to finance the purchase of a vehicle. These loans are typically unsecured, meaning they are not backed by collateral. The interest rates and repayment terms for personal loans can vary widely, depending on your credit score and other factors, and can be more complicated to deal with than a straightforward auto loan.
Some lenders may have specific credit scores or income requirements for certain loans, so be sure to ask before you go through the trouble of filling out an application. You can also use an online loan calculator to estimate your monthly payments and see which loan options will work with your budget.
It's a good idea to shop around and compare different loan options before deciding. Look at multiple lenders and loan types to find the best deal. Feel free to negotiate with lenders or ask for better terms or rates. Choosing a car loan that fits your financial situation and goals can help you save money and make car ownership more affordable.
Getting The Best Auto Loans
While every individual situation is different, you can do a few things to ensure that you get the best loan possible and save money on car buying.
Don't Go With The First Dealer Offer
Both new and used car dealerships offer financing options, but you should not simply accept the first offer. Having other offers from banks or other lenders can give you the upper hand in negotiating a financing agreement.
Know The Statistics
Knowing a little about the state of auto loans in the U.S. helps you know what to expect. Look at data from the last year and how that relates to previous data. For example, it can be helpful to know that in 2022 Q3:
● The average auto loan repayment was $700 per month for new cars.
● Car payments increased by 13.3% for new vehicles, 11.2% for used vehicles, and 12.1% for leased vehicles.
● Vehicle prices did not increase similarly; according to the U.S. Bureau of Labor Statistics consumer price index, new vehicle prices are up 8.4% yearly, and used vehicle prices are up 2%.
● The average car loan is $41,665 for new vehicles and $28,506 for used vehicles.
Based on these trends, you can expect to see monthly payments rise– which is not necessarily bad. Remember, higher monthly payments mean shorter-term auto loans with less interest.
Choose A Flexible Lender
The most important thing you need when choosing a lender for car buying is a loan that meets your needs. At iTHINK Financial, we offer competitive rates, pre-approval, and no application fee. Our auto loans are designed to get you in the driver's seat as soon as possible; we even offer a car-buying service to help you find the right car at the right price.