Financial institutions and car dealerships offer car loans to customers who don’t have the money to pay for the car in full at the time of the purchase. This financing option allows you to pay for the car over a longer duration, sometimes six years, with interest.
There are plenty of companies that offer loans for new and used cars.The type of loan you sign can end up having a huge impact on the total cost you’ll end up paying for a car, so do your research before making this investment.
About Car Loans
When you take advantage of auto financing, you’ll typically make a down payment or apply the trade-in value of your old car to the cost of the new car. The remaining cost of the car becomes the loan amount, which you’ll make monthly payments with interest to cover.
The auto loan rate determines the amount you pay in interest. Pay attention to this rate, as small differences in APR result in large differences in the total amount you’ll pay for your car.
New Car vs. Used Car Loans
Used car loans have higher APRs because they are considered riskier loans; people are more likely to default on used car loans.
T&I Credit Union offers competitive interest rates for auto loans. If a car is newer than two years old, we consider it new. Other cars fall into the used car category.
We offer new car loans with starting APRs of 1.99% for loans up to 60 months, 2.99% for loans up to 72 months, and 3.75% for up-to 84-month loans.*
Our used car loans start at 3.99% APR and are available for up to 60-months.*
Duration of Car Loans
Longer lasting car loans allow you to spread the cost of the car over more monthly payments, making the cost more manageable. However, the longer the loan, the higher the APR, meaning you’ll end up paying more overall for longer car loans.
Longer car loans also mean it will take longer to build up equity in your car. You won’t be able to stake your car against a future loan unless you have considerable equity in it. Long loans are also undesirable because car values depreciate quickly, and you don’t want to be in a situation where you owe more on your car than it’s worth.
About Interest Rates on Auto Loans
The interest rate you’ll have to pay on your auto loan varies based on the length of the loan, the car values and mileage, your location, and your credit score. Before making plans to go car shopping, it’s a good idea to experiment with an auto loan calculator to see how you can expect the APR to change based on the measurables of a car.
Credit scores are the biggest determinant of auto loan rates and won’t change based on what car you decide to finance.
About Credit Scores
A credit score is an attempt to measure your credit-worthiness or the likelihood that you’ll repay your loan in full, on time. Your credit score is based on your repayment history of previous lump-sum loans and revolving lines of credit, like credit cards.
There are three major credit reporting companies, Equifax, Experian, and TransUnion, which collect data about your finances and compile the information into a numerical value between 300 and 850.
You are entitled to a free credit report from each of the three credit reporting agencies once every year. It’s recommended that you check your credit report and credit score regularly to catch and resolve any inaccuracies.
How to Improve Your Credit Score
People with bad credit find it harder, and more expensive, to take out loans. It takes time to improve your credit score, but with healthy financial habits your credit score improves.
Making full and timely payments on your debts is one of the major ways to prove your credit worthiness. In this way, an auto loan can even help you improve your credit score in the long run, although taking out a new loan often causes a temporary dip in your score.
People with many separate debts often find that consolidating their debts can result in lower interest rates and make monthly payments easier to manage.
Before Shopping for a Car
To ensure you’re getting the best deal, do your research before talking to car dealers. Look into what interest rate you can expect to pay for your dream car, and calculate what your monthly car payments would look like. Make sure this fits into your monthly budget before deciding to buy a car.
Try and get pre-qualified for an auto loan so you can head to the dealership with confidence.
Getting Pre-approved for a Loan
Pre-approval for an auto loan will give you a much better estimate of the interest rate and monthly payments you’ll have to make. It will also act as a negotiating tool; you’ll be able to focus on the total price of the car rather than be distracted by sales pitches about monthly rates.
The car dealership might even try to beat your pre-approved interest rate, which could mean big savings. However, make sure you read the terms and conditions carefully; auto loan deals sometimes come with restrictions against buyout, variable rates, or other undesirable stipulations.
You can apply online to get pre-approved for an auto loan in about 20 minutes.
- Proof of income (W-2 or pay stub)
- Proof of assets (bank or financial statements)
- Employment verification
- Driver’s license and Social Security number
Calculating Monthly Payments
When you finance a car, it’s often more informative to consider the monthly payments rather than the total cost of the car when deciding what you can afford.
An online auto loan calculator can give you an estimate of the APR and monthly payments you should expect.
If you need to do some quick calculations, you can estimate your monthly payments by dividing the APR by 100, adding 1, and then multiplying that number by the loan amount. Next, divide by the number of months of the loan duration for an estimate of your monthly payments.
Things to Know About Car Loans
Car loans don’t typically cover fees associated with taxes, titles, or the DMV. Budget to pay for these fees with your down payment.
However, you can work with the loan broker to create a loan agreement that covers these additional fees. Most credit companies are willing to advance larger amounts of money to people with excellent credit.
What to Look for in an Auto Loan
Before signing an auto loan, read the terms and conditions carefully. You’ll be signing up for a long-term payment plan, so mistakes can be expensive.
Beside the obvious factors of loan amount, APR, and loan duration, look for additional penalties and fees. Ask your representative to clarify any parts of the loan you don’t understand.
Most banks charge a processing or application fee to get your loan started. Some banks charge a penalty for ending your loan early if you can pay it off before the loan term ends. T&I Credit Union does not charge a fee for repaying your loan early.
About T&I Credit Union
T&I Credit Union is committed to helping our customers reach financial security. We offer competitive auto loans an unparallelled support to help you make the most of your money.
T&I Credit Union offers additional products and services to our members. Our membership center provides free credit score reports, money management services, and a Skip-a-Payment service to help you get through tough times.
We also offer GAP Insurance so you can protect your investment. This offers a $500 deductible reimbursement and helps protect drivers against the financial loss of a totaled car.
If you don’t have the liquid assets to cover the cost of a new car, you can finance your purchase with new or used car loans. This allows you to invest in your future and pay it off later.
Auto loans are long-term and sometimes expensive commitments, but with the right management, you can use an auto loan to finance an appreciated investment and diversify your financial portfolio.
T&I Credit Union has your back. We are prepared to advance you the lump-sum you need now and help you build and support a financial plan that leads to long-term stability. Call us at (866) 810-6160 to learn more about how our auto loans can help you.