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Car Loans – All You Need to Know
Feeling in need of a new set of wheels? Looking to sell your current car and opt in for a newer model, but lack the cash? This is exactly the reason why car loans (auto loans) exist. Whether you’re looking for a new sports car and need upwards of a 100 grand, or just a simple used sedan, auto loans are usually the way to go when low on funds.
An auto loan is a form of personal loan given out over a period of a few years with an APR of around 4%. An APR or an Annual Percentage Rate is a number that determines how much money you have to pay back as interest each year. The amount of borrowed money, length of contract and your financial situation will all be determining factors when deciding the APR of your auto-loan, as well as the place you’re borrowing money from (dealer or a bank). For instance, if you borrow $20,000 over 36 months with and APR of 3% this means that the total sum you have to pay back is $21,225 making your monthly payment of $590 (without a down-payment)
You have to be at least 18 and have a relatively stable source of income to apply for car loans. In most cases your score will be pulled, so a no credit check loan might be a long shot when it comes to an auto loan. People with better credit ratings usually get a much better deal, but this doesn’t mean someone with poor credit can’t finance a vehicle or get someone to co-sign for them. Be careful when co-signing for someone, as you will be held equally responsible for their loan. Generally, a credit score of 640+ is acceptable to most car dealers and manufacturers. Timely payments will build your credit score, and the loan itself contributes to your credit mix and can significantly improve your standing.
The most important think to decide when getting financed for a car is whether you’re going to a dealer or a bank. Most people will go to a dealer, and that’s fine, but there are some things you need to keep in mind concerning car dealers. The interest rate is often higher when lending from a dealer compared to a bank. The dealers will usually try to include additional offers and extras with your loan such as insurance. Be sure to read the fine print and avoid paying for something you don’t need. Banks have a little higher APR, but they most likely won’t try to force you in to iffy deals. If you’ve decided to got a loan from a dealer, it may be smart to bring along someone who has experience in the field. Another set of eyes can help you stay objective when picking a car, and may even help you get a better deal. Some dealers might, however, offer zero percent financing for certain car manufacturers which is a big edge over the bank contenders.
The standard APR of a 60-month car loan in 2015 was around 4%, and financial analysts say it may get even smaller in 2016. The car market is expected to grow 15-20% this year, and with a lot more competition the loans will have to become cheaper. There’s also the option of online car-loan application that some financiers provide.
It may be useful for you to check out these online financiers, even if you don’t like the whole ‘Online-Loan’ thing because it’ll at least give you a feeling as to where the auto-loan market is at the moment. Visiting as many local car dealerships and banks is also a good way to compare offers and come out with the best deal possible.
Maybe you want to lease a car? This basically means driving the vehicle for a few months or a certain distance while paying a monthly fee. Sometimes a lease contract may allow you to purchase the set of wheels you’ve been driving. Monthly payments for a lease are usually lower than those of a full financing plan and often allow you to drive newer models. There are some mistakes you should avoid when leasing a car though and, as with all loans, it’s important to read the fine print carefully. Insuring the vehicle may seem like a luxury, but it should be considered a necessity instead. If the car is damaged or totaled the driver would have to compensate with money from his own pocket while still ending up without a car. Carefully assessing how much you’re going to be driving and being wary of your mileage limit is also a good way to save some cash when leasing a car. You also shouldn’t lease a car for too long, as you may end up paying substantial maintenance and insurance fees at the end of the lease. Typically a good period for a car lease is 2-4 years maximum.
There’s always the option of refinancing your current loan. It can be a good way of getting out of a tight place credit-wise. But refinancing isn’t always a bad thing. Sometimes it can help you take foot in a really unstable financial spot by lowering your monthly payments. In some cases refinancing or restructuring a loan can reduce your monthly payments by up to 15%. Another good way to help mitigate your current loan or even pay it back completely is to sell your current car. Check the market price and definitely let it go if it means pulling yourself out of debt.
It’s always possible you might get rejected for a certain auto-loan. Determining why this happened and taking the proper precautions can also be a productive experience and may lead you to a better deal in the future. Having a subprime credit score isn’t great, but some credit unions may offer pretty good deals to people with bad credit, as opposed to the stellar APRs you might get from dealers or banks.
A good thing to consider making is a monthly income/expense table. The monthly payment of your loan shouldn’t exceed ¼ of your monthly income and cutting down in some departments can stabilize your financial situation.
In the end, the best piece of advice to give is: Assess your finances before signing anything. It may sound simple, but if your source of income is unstable or you don’t have enough left-over money to make your monthly payments your credit score will suffer.