Seven out of ten new cars purchased are done with financing. This is because auto loans are a relatively cheap way to purchase the car or truck you are yearning over. For college students, taking out an auto loan is another good way of establishing a solid credit history so you can go on and purchase bigger and better things later in life. After you spend weeks test driving, kicking tires and hanging with the dealers, use these tips to go out and get yourself a great auto loan.
Where To Go
There are three main sources for auto loans: dealer, bank or credit union. The dealership is often the most expensive form of financing. According to interest rate information site Bankrate.com, many car dealerships will offer you a deal on your car if you borrow from them. But be careful with this, they often make their money on all of your interest payments. While it is possible to get a bargain from your dealer, be careful and crunch the numbers.
Banks have many types of borrowing options. If you want to borrow from a bank make sure you get quotes from many competitors. Rates can vary substantially.
Credit unions usually have the best rates. Bankrate says the average four year rate on a loan from a credit union is 7.55 percent compared to 8.23 percent at a bank. Also, many credit unions offer incentives for borrowing from them. Bankrate gives an example of one credit union offering gas cards to graduating seniors. And don't find it rare to get a 'skip payment' coupon for use one of those months when you are short on cash.
Make sure you are clear on your loan before signing. The first question you need to ask is 'what is my annual percentage rate?' Your APR is the actual rate you are going to be charged for borrowing. Second, ask about prepayment penalties. Make sure you are clear on any penalties that might come your way. A prepayment penalty could hit you hard if you wish to pay off your four year loan in 36 months. Make sure you are clear on these issues:
- You understand the annual percentage rate and total interest cost.
- All penalties have been discussed.
- The total borrowing amount is broken down between interest and principal.
- What are you going to pay each month?
- How many months is the length of the loan?
Finally, ask if this deal is subject to any conditions. What is the final documentation you need to get the loan signed.
How much you decide to put down will affect how much you pay in total interest. Lenders often have minimum requirements to what to buyer should put down. The typical down payment is five percent of the purchase price. But according to Bankrate, due to the significant decline in a car's resale value after it leaves the lot, you should think about putting down around 20 percent of the total bill. This will make sure you are not 'upside down' on the balance. Upside down is the term for when a borrower owes more on a vehicle than the current book value. This can hurt you big if you choose to sell the car. Also, be leery of dealer specials offering zero down. These are often used to lure buyers into high interest contracts.