Top Questions on Auto Loans
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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