Auto loans, here's what you don't know

Buying a car is often the second most important investment in life after purchasing real estate. Financing this project therefore requires substantial credit, hence the importance of knowing car loans before committing. But between the total cost of financing, the choice between LOA and traditional credit, or even borrower insurance, many elements remain unknown to the general public and can hold unpleasant surprises.

Buying a car often represents the second investment in life after real estate. To finance this significant project, it is therefore essential to understand all the ins and outs of a car loan before committing.

Between the different possible formulas, insurance, or even additional costs, many elements remain unknown and can hold unpleasant surprises. Let's do a check in.

First of all, there are two main categories of financing for a car: classic credit and Rental with Purchase Option (LOA). If traditional credit is better known, LOA is becoming more and more attractive. It generally includes maintenance and insurance in addition to the monthly repayment, but pay attention to the mileage!

Another determining and often neglected parameter: the amount of the personal contribution. The larger it is, the more advantageous a rate you can negotiate and reduce the total cost of financing. Think about it!

🥀 What is a car loan?

When you don't have the cash needed to pay for a new car, a car loan can help you buy it, whether the vehicle is new or used. When you get an auto loan, you borrow money from a lender to buy a car.

You agree to repay the funds over a set period of time, plus any fees and interest you accrue. For many people, buying a car requires taking out a loan.

There are different types of car loans, and depending on your financial situation, one of them may be a better choice than others. Get a better understanding of common types of auto loans before you start applying for one.

Generally, there are two ways to borrow money to buy a car: direct loan or financing by a dealership.

✔️ Direct loans

Direct lenders include banks, credit unions and other financial institutions like online lenders.

Borrowing from one of these lenders can give you the opportunity to compare loan terms for you and may give you the opportunity to get pre-approved for a specific loan before shopping around. And when you're ready to buy, you'll use that loan to pay for the car.

✔️ Dealer financing

This option, which is managed by your dealership's finance department, makes it easier to purchase your vehicle and your auto loan in one place.

Dealers typically have relationships with multiple lenders, so you may be able to compare terms and even qualify for low-rate programs or manufacturer-sponsored incentive programs.

But be on the lookout for dealers “ buy here, pay herei” which offer high-interest auto loans to buyers who don’t have strong credit.

If you don't want to take out a traditional auto loan or don't qualify for approval, consider asking a family member to help or wait until you've saved enough money. You can also research an alternative loan option, such as a personal loan from a peer-to-peer lender.

🥀 How do car loans work?

For many people, buying a car is one of the biggest investments you'll make, second only to buying a house. Although paying with cash is ideal, the reality is that most people need a loan to pay for their car, whether new or used.

As something that earns interest as you pay it back over time, it's important to be prepared before taking out a car loan. The amount you borrow, how long you take to pay it back, and your interest rate all affect your monthly payment amount.

• The amount of the loan. It can be significantly lower than the value of the car, depending on whether you have a trade-in vehicle and/or are making a down payment.
• The annual percentage rate. This is the effective interest rate you pay on your loan.
• The term of the loan. This is the time you have to repay the loan, usually 36 to 72 months.

One of the most important things to understand about how auto loans work is the relationship between loan term and the interest you pay. A longer loan term can significantly lower your monthly payment, but it also means you pay more interest.

✔️ Example

Consider a car loan of $25 at an annual rate of 000% and a term of 3,00 months. Over 48 years of payments, you will pay $4 in total interest on the loan. If you extend this same loan for 1 months (or 561 years), you will reduce your monthly payment by $60, but you will increase the total interest you will pay from $1 to $561 $.

There is no single way to determine the best car loan. That's why you need to take the time to understand how auto loans work and make the right decision based on your specific financial situation.

Some people will benefit the most by taking a longer term to lower monthly payments and using the difference to pay off higher interest debt. Others prefer to make a payment higher monthly and repay the loan sooner. You just need to arbitrate.

🥀 Requirements for applying for a car loan

To qualify for a car loan, you will usually need to complete a loan application that provides information about your financial situation. You will likely need the following information for the process to run smoothly:

• Social Security number
• Current and past addresses
• Current and past employment information
• Total income and sources of income
• Information about any other debt you may have

Typically, the approval process includes checking your credit scores and may begin with pre-qualification. This may cause a slight pull on your credit, meaning it won't affect your credit scores.

If you are preapproved and move forward with a complete application, the lender will usually perform a hard inquiry on your credit.

Which can lead to a drop in your credit scores. And even if you've pre-qualified, your loan terms and approval may differ when you submit a complete application. But as long as you do all your loan comparisons within a short period of time, there will be little negative impact on your credit.

🥀 The steps to get a car loan

After all that I have just told you above, you already know whether you need a car loan or not. Suppose you need it and the burning question is how to get it? Here are the steps to follow to get the car loan that's right for you.

✔️ Step 1: Decide if you want a new or used car

Decide if you want a new car or second-hand is essential. This can depend on different factors, such as your finances, family life and amount of travel. New cars will last longer, but their value will decrease quickly.

However, you can often get better interest rates on a new car loan because if you default on the loan, the lender can resell the vehicle for a high value.

A loan for a used car is generally more affordable, but the car may require more maintenance, which can add up in the long run.

✔️ Step 2: Determine how much you can spend on a car

Take a long look at your finances and decide how much you can spend on your vehicle. How much can you put for one advance payment ? After determining that number, consider the recurring expenses of owning a car, such as gas, car insurance, and regular maintenance.

what about the loan itself? The longer the loan term, the less you will have to pay each month. But the downside is that you'll end up paying more in interest, eventually leading you to pay a lot more than the car is actually worth. Consider all of these things when deciding your price range.

✔️ Step 3. Check your credit report

Your creditworthiness will have a huge impact on the type of loan for which you are approved, so check your credit report before filling out the application. The better your credit score, the better your loan terms.

✔️ Step 4. Complete a loan application

For a loan application, you will be asked to provide all or part of the following information:

• Basic information (name, address, date of birth)
• Social Security number
• The name of your current employer and the number of years of service
• Your income
• Bank account numbers
• Whether you rent or own your home
• Typical monthly expenses
• Credit report

Keep in mind that every time you apply for a loan, it shows up on your credit report and hurts your credit review. However, if you apply for more than one loan in one 14 day period, this will only count as one request. This duration may vary from one country to another.

✔️ Step 5. Get pre-approved

The amount you are pre-approved for will give you an idea of ​​your maximum budget. If you are getting a loan from the dealership, find out in advance if you can be preapproved for a loan.

Different dealerships will have different practices, but some will allow pre-approval before you have selected a specific vehicle.

✔️ Step 6. Find a co-signer, if needed

Sometimes lenders will only approve you for a car loan if you have a co-signer. If you have a low credit score or insufficient income to cover the monthly payments, the lender may require you to have a co-signer on the loan.

A co-signer is someone with good credit who agrees to take full responsibility for the loan in the event of default. The payment appears on both of your credit reports, so make sure your co-signer fully understands the terms.

✔️ Step 7. Choose a vehicle

Select a car that fits your needs and your budget. Negotiate the best possible deal on the vehicle and your loan rate, then figure out how much you'll need to pay each month.

Car Loan FAQs

What is the difference between a classic loan and a LOA for a car?

Rental with Option to Purchase (LOA) generally includes maintenance and insurance in addition to financing. Classic credit only concerns the purchase. But the LOA implies mileage limits.

Why is the personal contribution so important on a car loan?

The greater the contribution, the more banks grant an advantageous interest rate on the financing, which significantly reduces the total cost of credit.

Is the car insurance offered by the bank compulsory?

No, you can take out car insurance with the insurer of your choice as long as it presents a sufficient level of guarantee in the eyes of the bank.

Does the car loan include other fees?

Yes, you must also take into account the bank's filing fees, registration fees, possibly a mechanical guarantee, etc. Be vigilant at all these points.

How to properly negotiate your car loan?

Compare offers, know your file better, bring the competition into play by showing the best opposing offers, and do not hesitate to ask for certain fees to be waived.

🥀 Closing

In this article, we have reviewed the various essential but often overlooked elements of automobile financing: the subtleties between LOA and traditional credit, the importance of the personal contribution, the pitfalls of insurance, or even all the additional costs. likely to increase the bill.

From now on, you have all the cards in hand to choose your car loan with full knowledge of the facts. Take the time to compare the different offers from banks and dealers, using an online simulator, according to your needs.

And don’t hesitate to negotiate firmly to obtain the best conditions! A little time spent beforehand will save you a lot of disappointment later. You are now ready to get started and calmly finance the purchase of your next vehicle. All that remains is to find the model of your dreams! Good road !

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