Between the cash for clunkers program and desperate dealer incentives to promote car sales as major vehicle manufacturers struggled to avoid bankruptcy, the automotive consumer was the only real winner in terms of the 2009 auto industry. But as we celebrate a New Year – and the start of a brand new decade – with lots of lingering economic uncertainty, many people who are in the market for a car or truck want to know the outlook for auto loans in 2010.
While nobody has the benefit of a crystal ball, consumers should have much better success this year compared to last year when it comes to auto loans and vehicle purchases. Of course there are variables that nobody can possibly predict, but according to recent news reports there are some very compelling reasons to be optimistic about car loans.
Last year, for example, the global credit markets were still reeling from the aftershocks of the unprecedented financial meltdown that rattled banks and other financial institutions at the end of 2008. The future of the entire banking system was in jeopardy, it seemed, from 2008 through the first half of 2009. Banks and other lenders were paralyzed by excessive debt, borrower defaults, and an overall lack of cash with which to make auto loans. Meanwhile the automotive industry was in the midst of its own severe crisis, and the oldest and most reputable automobile manufacturers in American were collapsing – leaving dealerships in a panic.
Those factors created a double whammy for the auto loan niche of the credit market. On the one hand there was very little credit to go around among traditional banks. Meanwhile some of the biggest players in the auto loan industry – those lenders that are and on the other hand some of the biggest auto loan institutions owned by or affiliated with big automotive companies like GMC – were completely strapped for cash. The bottom line was that it got much harder to get a loan of any kind, and that included auto loans. So despite lots of deals and perks like the cash for clunkers program, many consumers still found it hard to get approved for their auto loans in 2009.
But now the business headlines are announcing that while interest rates are still historically low, consumers are finding more loan availability. The Boston Globe newspaper for example, recently ran a story explaining that easing of credit restrictions on auto loans is finally starting to inspire a surge in buying. The well respected Ward’s Automotive Group – which tracks data about the auto industry – reported that light vehicle sales rose approximately 20 percent this past December compared to the year before. Meanwhile the most recent data available on car loans from financial institutions shows that they are approving more loans, and that is especially true for consumers who have average or above-average credit.
As car companies and banks continue to see positive economic signs on the horizon – such as improved auto sales figures and fewer defaults, foreclosures, and bankruptcies – they will both gain the confidence to increase auto finance lending. That will, in turn, encourage buyers to take out more auto loans – so that a rosy economic outlook can potentially start a chain reaction by creating a cycle of improvement that just gets better and better.
But before we can put on our party hats and toast the end of the recession – and the full fledged return of credit in the form of easier and more affordable auto loans – the unemployment picture must first improve. Employment data is still a wild card, and while there are signs of economic improvement the employment outlook remains bleak. Recent news reports show a rather unpredictable hiring forecast, and it seems that just when we get some good news regarding labor and employment another statistic makes the headlines to deflate our enthusiasm. The President has vowed to make job creation a top priority in the coming months, however, and if the national unemployment rate backs away from double digits and starts to shrink, that will be good news for auto loans.
The reason that auto loan availability is tied to employment figures and other general economic data is that when people are working and earning, they are in a better position to repay their car loans in a timely fashion. That makes auto loans easier to get, and as lenders start to compete for your business, those auto loans also become more affordable.
So while the forecast for auto loans looks good so far, based on current news, keep an eye on the business pages. If other statistics also start to fall into place it could turn out to be a banner year for auto buying.
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Here are three expert tips for receiving the best auto loan possible, regardless of what kind of car or truck you intend to buy.
#1
Look Beyond the Dealer for Auto Loans
The first thing for consumers to understand before buying a vehicle is that when it comes to paying for a car or truck, there are lots of options. To be in the strongest negotiating position when you arrive at the car or truck dealership, first secure your vehicle financing and bring a letter with you that documents the fact that you already have loan approval. That way the dealer or salesperson will know that you are a serious and committed buyer, and he or she will not waste their time or yours touting various dealer finance options. You can focus instead on the nuts and bolts of the transaction to get the best vehicle at the best possible price. If you decide to do an auto loan through the dealer, compare the interest rate, terms, and conditions they offer you to those offered by the banks in your area. Choose the best loan or demand a discount off the sticker price to compensate you for any extra costs that the dealer’s loan adds to the bottom line when compared to auto loans from other lenders.
#2
Take Care of Your Credit Score
No matter where you go for an auto loan, the lender is going to look at your credit score and then offer you a loan based on your credit history. Lenders are not nearly as easy-going as they were 2-3 years ago, back before the credit crisis, and even if you had a decent score back then it will likely be interpreted as a lower score these days. What was a good score back in 2007, for instance, is now average or even below average. So before you shop for your car contact one of the major credit reporting agencies and check your FICO score. This is the number bankers use to get a snapshot view of your credit worthiness.
You can review your credit file and FICO score for free once a year, or pay a small fee and do it more than once a year. Read the full report, challenge any errors or omitted information that you think needs to be corrected or updated, and then begin to take tangible steps to bolster your rating.
That can be done by paying off outstanding balances on credit cards, by being careful not to miss payments or make a late payment, and by generally reducing the amount of debt you carry. The more income have and the lower your debt, the better your chances are of having a stellar FICO score that can get you preferential treatment in the form of lower rates and cheaper auto loans.
#3
Be Patient, and Don’t Forget to Do the Math
Understanding a little bit about the mathematical calculations that go into every auto loan can help you save money while also avoiding common pitfalls and automobile dealership tricks of the trade.
The interest rate is perhaps the most important number to pay attention to, but it can be a moving target right up until you sign on the dotted line. That’s because the interest rate is not set in stone but instead fluctuates on a daily basis – depending upon whether other prevailing rates are going up, coming down, or remaining steady. But once your lender commits to a loan and a specific rate, however, you are “locked” into that rate – which means they can’t change it unless you somehow violate the terms of your loan agreement.
The exception to this rule is the so-called “adjustable rate loan,” a type of loan typically used for mortgages and home equity loans. But most consumers are better off buying a car with a more predictable fixed rate that will not change once the loan is made. So if you plan to use a home equity loan, for example, to pay for your vehicle then you should study the terms of the loan agreement closely to determine whether yours is a fixed rate loan or one of the more volatile and risky adjustable rate loans. Shop around, evaluate all your auto loan options patiently, and then select the one that is right for you and your particular needs.
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To help you along the path of learning how to shop more skillfully and successfully for an auto loan, here is an overview of the top three things consumers generally ask about auto loans – along with some expert answers.
1.Where Can I Get a Good Car Loan?
There are lots of ways to get a car loan, and there are even auto loans for people with lousy credit. Car loans are available from banks, and these are best for people who have good credit. Sometimes credit unions offer similar auto loans at even better prices than banks do, so if you belong to a credit union keep that option in mind as well.
Meanwhile if you have bad credit it is possible to go a so-called “bad credit lender.” These companies specialize in lending to people who have had a recent bankruptcy or other credit crisis, but they typically charge higher rates of interest so it may be better to wait until you have a chance to rebuild your credit before taking out one of these more costly auto loans. Of course you can also apply for credit at the dealer who is selling you the car. Although this usually means you wind up paying more over the long term, it can be a quick and easy solution for a car buyer who has not been able to secure a more reasonable loan elsewhere.
2.What are the Major Pitfalls of Auto Loans?
One of the major pitfalls associated with auto loans is paying too much because you do not have a complete understanding of the terms and conditions of the loan, or the ultimate overall cost to repay that auto loan.
To avoid making this mistake, always compute your payments in a comprehensive fashion. Don’t just look at the monthly payment and decide to take out an auto loan because that monthly installment is within your budget. The reason those incremental payments get lower is because the time it takes to actually pay off the loan gets longer. So you might wind up with a reasonable payment but end up paying it off for years – a situation that can leave you owing more the car is still worth.
Study the interest rate, too, paying close attention to the Annual Percentage Rate or APR. This is the rate of interest computed on the outstanding balance, so the lower the better. Get a low APR plus a shorter term loan and you have the right recipe for a good auto loan at a reasonable price.
Another mistake that is easy to make – but which most people don’t know about – is accidentally lowering your credit score by making too many credit applications. It’s better to gather auto loan information from lenders without actually applying for a loan or letting them check your credit history. Then pick the best one, run your credit on that one, and you’ll get your auto loan without dinging up your credit score along the way.
3.How Do I Avoid Getting “Upside Down” in an Auto Loan?
Another huge error that experts suggest you watch out for is buying a car with no equity or down payment. As soon as you roll the car off the dealer’s parking lot its price depreciates. If you didn’t any money down or offer a trade in with some cash value, that means that as soon as you drive away your car is worth less money than you still owe on it.
While it may be very tempting to buy a car with no money down and a low monthly payment, that sets you up for a long repayment period at a higher rate – and plenty of time for problems to occur. Because you have no equity in the vehicle – which is the difference between what you paid for it and what it is worth now – you won’t be able to sell it to a buyer willing to pay you enough to cover your loan. You’ll be stuck with it, in the dreaded situation known as being “underwater,” and you can drown from that kind of burdensome debt.
So pay a good-sized down payment or do a trade-in to get a cash credit, or do both. The more you invest in the car up front, the less chance you have of ever winding up “upside down” in the auto loan.
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Buying a car or truck can be a really rewarding and thrilling experience, and there is nobody who does not enjoy the feeling of owning a vehicle that still has that “new car smell.”
But the average consumer also greets the process of shopping for and purchasing a vehicle with a certain amount of stress or trepidation. That’s only natural, because walking into an auto dealership can sometimes feel like diving wallet-first into a shark tank. Without specialized training and education it is really difficult to compete with the sales pressure and marketing experience of a professional car or truck sales team. The paperwork can be intimidating, and one of the most confusing parts of vehicle buying transaction is the financing or the auto loan.
Despite the fear of dealerships, however, it is not necessary to fret over your purchase. Just take advantage of free information readily available to consumers, ask as many questions as you want, and trust your gut instincts. Last but not least, remember to always shop just as carefully for your auto loan as you do for the vehicle itself. The biggest mistakes that people make when buying new vehicles are, after all, directly related to the financing of the loan, the down payment, and the various payment components of the transaction.
Dealers understand that fact, and for that reason many car dealerships focus just as much – if not more – on making profits from auto loans as they do on selling and servicing automobiles. So those shoppers who come to a dealership armed with a basic understanding of loans – including how interest rates, monthly payment plans, and down payments work – are in a much better position and will almost always walk away with a better deal.
Even if you don’t have the cash – and most people don’t, especially in today’s challenging economy – you don’t have to rely only on dealer financing. You can shop for auto loans elsewhere, like at your local bank or credit union, for example, and doing so helps to create healthy competition between the dealer’s loan department and those at other financial institutions. Competition is the key to getting a better deal when buying almost anything, and that is especially true when looking for the most attractive automobile loan.
Of course that doesn’t mean that you can’t get a decent dealer-originated auto loan. Sometimes car and truck dealerships offer irresistible financing. But those opportunities are few and far between and are typically contingent upon other terms and conditions that tend to restrict your choices and add to the long range cost of the auto loan over time.
Car buying experts always recommend that consumers avoid taking out auto loans from dealers until they have first examined all their other alternatives. That’s because dealerships often work with the same kinds of lenders that consumers do, and while they may get wholesale pricing on loans they don’t necessarily pass the savings along to you. A dealer may instead add their own finance charges on top of the original loan, so the consumer still winds up paying more than necessary.
When comparing one auto loan to another, the main things to consider are the interest rate, the total cost of repaying the money you borrow over the entire lifetime of the loan, and any extra fees or charges added on to the loan by the lender. The bigger the down payment is, the cheaper the loan will be in the long run, so don’t automatically jump at a loan just because it has a low down payment requirement. Similarly, the higher your credit rating happens to be, the lower and more affordable the interest rate and other fees will be. So having good credit pays off big time when you shop for an auto loan. If you don’t have good credit you can still get a loan, but it is better to plan ahead and work on cleaning up your credit beforehand, because a higher credit score will save you lots of money.
Keep in mind that the purchase of a vehicle is usually one of the most expensive and important purchases you will make in your entire lifetime. Do some background research and then crunch the numbers while taking all relevant factors into consideration. Once you’ve managed to find an attractive auto loan you are well on your way to becoming a satisfied automobile owner who stands a much better chance of getting not just a great car or truck but also an auto loan worth bragging about to your friends.
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