Here is a list of three of the most often asked pre-owned loan questions, along with some answers intended to help make the pre-owned car buying and loan application process go easier and smoother.
1.How Does a Pre-Owned Car or Truck Loan Differ from a New Vehicle Loan?
The biggest difference between a pre-owned loan and one for a new vehicle that just rolled off the manufacturer’s truck is that lenders have an easier time with new auto loans, whereas a vehicle in pre-owned condition is not as easy to evaluate and appraise. They would usually rather lend on a new car loan because they can make more money on those since new cars need more cash to pay for them than do used cars and bigger loans mean bigger profits for lenders. They also trust new cars to have value that used cars may not, and if you are lending somebody money and keeping the title to the car for collateral in case they stop paying you back, the value of that car and car title becomes a really important deal.
Think about it from a car buyer’s point of view, since that is what you are and what you understand. If you are buying a brand new car you probably don’t have to worry as much about the mechanical condition of the car, its paint job, the tires, and the condition of the upholstery and interior gadgets like the radio, CD player, or GPS system. That pretty much goes without saying because you trust the dealership to sell a quality car, and even if you don’t trust the dealer or car maker you most likely have a warranty to back you up in case something goes wrong within the first few thousand miles.
But if you are in the market for a used or pre-owned car the situation changes dramatically because now you have to really study what you’re buying to make sure it works properly, hasn’t been in a flood or accident or other calamity, and that the owner before you took good care of the vehicle and didn’t run up the mileage on the odometer.
2.What Challenges Will I Face While Seeking Out a Pre-Owned Car Loan?
Keeping what we just discussed in mind, it is easy to appreciate the point of view of lenders and why they are little more skeptical regarding pre-owned versus brand spanking new car loans. So as you probably guessed, many conventional kinds of lenders – like banks that tend to be more conservative and traditional in their lending practices – are going to be hesitant to lend you much money if you are buying a vehicle that is already used and might even be well on its way to getting old.
One reason why they prefer to lend on new cars, for example, is because with a brand new vehicle it is easier to do an appraisal and set a realistic value on the car or truck – which helps a lender know how much it is really worth in the current buyer and seller market. High miles and lots of years or potential for abuse on a car translate into less value in the resale market. For any lender who has to repossess the car and sell it to the highest bidder to recoup their lost money, that becomes a major consideration.
3.How Long are Repayment Periods on Most Pre-Owned Car Loans?
Because of the types of issues covered above, most loans for used cars are not as long as the ones offered with new cars. While 36 or 48 month pre-owned loans are not uncommon, longer loans may not be readily available to you if you are buying a used vehicle. That’s simply because by the time you pay off a loan with an extended payback period the car or truck – which is the lender’s collateral in case you default on the loan – is too old to be of much value at a lender auction sale. The same goes for buying a used vehicle that is already several years old when you purchase it.
Going in search of a pre-owned vehicle loan always means that you will eventually wind up looking for reliable answers to perplexing questions about those loans and how they work. Consult the experts, read as much as you can about pre-owned loans, and take advantage of advice and resources like those found on consumer information sites on the Internet to get educated and then get a good deal on a pre-owned car loan.
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Apply the info provided in this trio of top questions and answers that people are asking about new car loans and you should be well on your way to that new car smell – and the fun thrill of the new auto ownership experience.
1.Where can I get the best deal on a new car loan?
The answer to this question will depend somewhat on your own unique financial situation, because there are a variety of lenders who make new car loans but many of them cater to a particular type of borrower. If you have excellent credit, for example, you will probably qualify for preferential rates and you can most likely walk into any bank and snag a really reasonably priced and manageable new car loan.
That’s because lenders are suffering from the mistakes they made within the past few years when they lost zillions of dollars by making bad loans and even worse Wall Street investments in high-risk mortgage backed securities and other pie in the sky ventures. If you are a responsible borrower with a great credit history, a low ratio of debt to income, and you have a steady job in this unsteady economy – then bankers want to court you and win your business.
If you have terrible credit and have recently gone through a financial crisis like a bankruptcy or foreclosure, on the other hand, those same bankers will probably turn down your loan application. You may need to go to a specialty lender who primarily does business with so-called “bad credit” consumers. You’ll pay more for your new car loan – mainly in the form of much higher interest on the loan – but when you need to borrow money and don’t look so good on paper that can be the best option.
Those who are somewhere in between can find their new car loans at banks and other lenders, but the terms and conditions of the loan will depend on your FICO score, income, credit history, and the policy of the particular lender. You can also turn to the dealership where you are buying the new car for financing, although that is generally the most expensive way to buy a new car.
2.When should I start looking for my new car loan?
Most buyers look for their new car loan at the last minute, once they’ve already picked out – and fallen head over heels in love with – their new vehicle. But unfortunately many of them get a huge jolt of disappointment when the lender breaks the news to them that they have to break off the love affair with that particular dream car and go shop for something a little less sexy, a little more boring and generic, but a lot more affordable. To avoid this kind of misstep, savvy shoppers should start to look for their new car loan as soon as possible.
Those who give themselves as much as 3-4 months will be in the most advantageous position, because that will give them enough time to review their credit report, make some changes in their finances, and prepare for a successful and swift loan approval process. Even if you don’t have that much time you can still visit lenders and find out what they expect from you, what kind of criteria you will need to meet in order to get your new car loan, and how much you can expect to borrow. That way you can shop with a realistic sales price in mind and buy a car you’ll love without having to worry about the downside if your loan does not go through.
3.What is the biggest pitfall with new car loans?
The biggest pitfall to avoid is borrowing more than you can handle, even if a lender or dealership offers it to you. Consult a financial planner, accountant, or friend who is educated about personal finance and determine how much car you can really and truly afford. Then stay within that budget so that buying your new car becomes an experience of freedom and pleasure, not stress and turmoil because suddenly all of your focus is on money problems. Debt that is reasonable can be a great asset and tool, but tip the scale too far and it can become a catastrophe. Shoot for a total auto expense – including car loan payments, insurance, gasoline, and upkeep – that does not exceed 10 percent of your total income. Try for 6-8 percent, but if you find yourself spending 10 percent or more it is a warning sign.
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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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