Whether you’re purchasing your first car or your seventh, buying a new vehicle is exciting. From the model, features, and color, you have many important decisions to make. However, that excitement can wane the minute you start talking about finances.
Because vehicles come with higher price tags, most people cannot pay cash for a new car. Instead, they turn to auto loans for their financing needs. Before you sign on the dotted line, it’s crucial that you understand the most common terms associated with vehicle loans and how they will impact your finances.
When taking out a loan, a lender will charge you interest on the amount you borrow. Interest is a lender’s payment in exchange for lending you money. These rates are typically displayed as an Annual Percentage Rate or APR.
As a borrower, you want the lowest interest rate possible. While lenders will typically display their lowest available rate in advertisements, the actual rate you receive will be based on other factors – including your credit score and history. Typically, financial institutions use a tier-based system for pricing loans.
Lenders use your credit score to determine how well you can manage money and credit and how likely you are to repay the loan. The higher your credit score, the lower the interest rate because lenders view you as less financial risk.
Before applying for an auto loan, it’s wise to review your credit and see if you need to make improvements. Even a slight boost in your credit score could translate to significant financial savings.
An auto loan term is the amount of time you have to pay back the loan. Your interest rate can also vary based on the length of the loan. For example, if you choose a 3-year term (36 months), your interest rate could be lower than if you were to choose a 6-year term (72 months). Each lender is different in how they price loans, and you need to check if terms affect the rate you will receive.
Most auto loan terms range from 36 to 60 months, with some lenders even offering terms up to 84 months. Longer terms lead to lower monthly payments, but you will pay more interest over the life of the loan.
It’s important to note, if you do choose a longer term, your chances of being upside-down in your vehicle go up. Being “upside-down” means that you owe more than the car is worth. It’s smart to keep your loan terms at or under 60 months.
When financing a car, you typically have two options. You can go directly to the dealership, pick out a vehicle, and finance with the dealership or another lender approved through the dealer. Or you can become pre-approved with a lender BEFORE you go car shopping.
A pre-approval means that you applied for a car loan with a lender and were approved prior to visiting a dealership. While this may seem like an extra step, it offers incredible financial benefits you do not want to miss.
First, you know exactly how much you can afford to spend on a new car with a pre-approval. This helps you stay within your budget and avoid costly add-ons. Secondly, dealerships know you cannot go over your approved amount, giving you the upper hand with price negotiations. Finally, it helps you to avoid dealership pricing games or gimmicks.
A down payment is a lump sum of money you pay upfront when purchasing a vehicle. A down payment can be helpful because it can lower your monthly payments and reduce the amount of interest you pay. If you are trading in a vehicle, the value of that trade-in could also be considered a down payment.
A down payment can also help offset depreciation. Depreciation is the decline in a car’s value, causing you to owe more than the vehicle is actually worth. This begins to happen as soon as you drive a new vehicle off the lot. You can avoid this scenario by placing a larger down payment on the car you purchase.
We’re Here to Help!
While exciting, buying a car can also become confusing rather quickly. That’s why a pre-approval is so beneficial and typically leads to financial savings. Our lending team will review your finances with you one-on-one and get you approved for a loan amount that fits your budget and helps avoid unnecessary add-ons or extra interest expenses.
Please stop by any of our convenient branch locations or call 248-322-9800 extension 5 to speak directly with one of our auto loan experts.
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