It’s time for a new car. Exciting! New or used, with so many options to consider, you’ve probably done a heap of research on makes and models. And if you plan to finance your purchase, you’ll need to research your borrowing options as well.
From learning about interest rates and loan terms to deciding on where to get financing, there’s a lot to get your head around. But it does pay to be prepared. The better you understand how car loans work, the more likely you’ll be able to secure the best loan for your situation.
The Basics:
- You take out a loan from a financial institution like a bank or credit union, or from an auto dealership (unless you borrow from a family member or friend).
- You pay the loan back, including the interest charged, in monthly installments.
- The amount you borrow, the length of the loan, and the interest rate will all determine the size of your monthly payment.
- A bigger down payment means a smaller loan and less interest to pay back.
- It’s important to keep up with payments or you risk losing the car and damaging your credit.
Loan Terms
When you shop around for lenders, you’ll be offered different terms depending on your credit history and the type of lender you’re dealing with. Taking longer to pay by spreading out the payments over 72 months, as opposed to 48 months, may seem like a good idea as your monthly payment will be lower. But keep in mind, you’ll end up paying more interest in the long run.
However, there are times when it makes sense to spread your car loan over a longer period. For example, if you have other higher interest debts you want to pay down first.
Conversely, if you want to get your car loan paid off as quickly as possible, you can opt for a shorter loan period. This will mean higher monthly payments, but you’ll be charged less interest over the course of the loan. Another way to pay off your loan faster – if your lender allows this – is to make extra payments. (If you go this route, be sure to check that you won’t be charged a pre-payment penalty for early pay off.)
Choosing a Lender
There’s not one right way to finance a car purchase. It all depends on your situation. The lender will look at your credit history, income, and monthly expenses to calculate your ability to repay the loan.
Here, we highlight a few options:
Financial Institution
When you go through a bank or a credit union, you’ll be able to get pre-approved, which gives you several advantages.
- Allows you to compare loan offers from several institutions.
- The loan officer won’t be trying to sell you a car at the same time as the loan.
- Lets you car shop as if you’re paying with cash, which gives you a negotiation advantage.
- Allows you to focus on choosing the right car and avoid haggling with the dealer over loan terms.
- Helps you stay on budget as you have a set amount to spend.
- You avoid paying dealership interest rates that are often marked up.
- The dealer may try to win your business by offering you better terms than the bank’s.
Auto Dealer Financing
Getting a loan through the dealership is not always a bad idea. In certain situations, dealer financing can be the best solution. For example, if you don’t have time to research multiple banks or credit unions, or you’re in a hurry to buy your new ride, the convenience of doing everything in one place may make sense.
With financing from the dealer, you’ll be able to arrange your loan and drive off the lot with your new car on the same day. Another benefit to using the auto dealer’s financing – if your credit is less-than-stellar, they may be more willing to work with you.
Online Lender
Looking for financing online can make comparison shopping a lot easier. You’re able to look at multiple lenders side by side to see who’s offering the best deal. Moreover, online lenders’ rates are often more competitive than a traditional bank’s rates. However, read the small print as the fees can sometimes be higher. Also, it pays to remember that not every online lender gives great customer service. Check customer reviews and the Better Business Bureau for complaints before you commit.
With so many borrowing options out there to suit all levels of finances it’s not difficult to procure a car loan. However, it’s key to do your research to get the right loan so you can keep up with the payments and enjoy driving your new car. It’s also important to get the right auto insurance coverage. Speak with a Wawanesa agent today to learn more about your coverage options.
