What You Need to Know About Auto Loans

What You Need to Know About Auto Loans

You need a car to get to work, to pick up the kids from school and to run your everyday errands. The problem is, you don't exactly have a large stack of cash lying around to go out and purchase either a new or used vehicle. That's where auto loans come in. Just as you use a mortgage to purchase a home and a student loan to cover the cost of school, you use an auto loan to help you purchase a car.

Before you rush to a dealership to pick out and drive off in your dream car, it's important to understand how auto loans work and how you can apply for one. Doing your research in advance can save you money, both in terms of the price of the car you buy and the cost of the loan you take out.

Applying for a Car Loan
If you need to finance the cost of your new car, the first step in the car buying process should actually be applying for an auto loan. Just as getting pre-approved for a mortgage shows a real estate agent that you're a serious buyer, and that you've done your homework, getting pre-approved for a car loan shows the dealer that you mean business.

There's another upside to applying for a car loan before you start looking at cars. Edmunds recommends getting pre-approved to give yourself a leg up when looking at cars. When you are pre-approved for a certain loan amount, you'll be able to resist the temptation to buy more car than you can afford. Shopping around for a car loan before you start shopping around for a car lets you compare the interest rates, fees and terms offered by a variety of lenders, and allows you to pick the one that gives you the best deal.

Understanding the Terms of a Car Loan
How much a car loan ends up costing you depends on few different things. One major factor that influences the cost of the loan is the amount of interest the lender charges. Usually, you'll see very low rates advertised for auto loans, but those rates are often reserved for people with the best credit scores and might not be the actual rate you're offered.

Another thing to consider when getting a car loan is the length of the term. Often, loans are for terms of three to five years, although there is room for variation. Typically, the shorter your car loan, the less you'll pay over time and the less time you'll spend paying off the car. Consumer Reports suggests choosing a term that is as short as possible. You will have a higher monthly payment, but you are likely to get a lower interest rate and your car will be paid off more quickly.

Making a Down Payment
Should you put money down when you buy a car? Paying a portion of the cost of the car up front reduces the amount you need to borrow and reduces the risk that you'll end up upside down on the loan, that is, owing more on the loan than the car is currently worth. The more money you are able to put down, the better. Usually, a down payment between 15 and 20 percent is ideal.

Mind the Gap
One of the downsides of buying a car is that it's a rapidly depreciating asset. Your car's resale value drops the minute you take the keys and drive away. That can be a drag, and it can become a problem if you total the car soon after purchase. The insurance company will usually pay you the current value of the vehicle, which might not be the full amount you still owe on the loan.

That's where Guaranteed Auto Protection (GAP) insurance comes in. GAP insurance will make up the difference between the value of the car and the amount you owe on the loan. Not every borrower needs GAP insurance, though, so it is important to read the terms of your standard insurance policy carefully. Some policies will pay the amount left on your loan if the car is totaled. Plus, if you make a larger down payment, you might not need GAP insurance, since the amount you financed might not exceed the value of the car.

Your Credit Score and Car Loans
Although people with the best credit scores get the best interest rates, you don't need stellar credit to get a car loan. If you have a lower score, you're likely to see a higher interest rate. But, since your car acts as collateral on the loan and a lender can repossess the vehicle if you don't make payments, it is usually easier to get a car loan with lower credit than other types of financing. Many lenders also have car loan programs specifically designed for borrowers who are trying to rebuild or improve their credit histories.

Dealership Car Loans vs Credit Union Car Loans
Many car dealerships work with lenders to offer customers financing. But, you will typically get a better rate if you shop around beforehand. As US News and World Report noted, you will typically find lower interest rates and lenders who are more willing to work with you, even if you have poor credit, at a credit union.

Before you start thinking about color, trim, and vehicle model, stop by your local credit union to learn more about your auto loan options today. Coosa Valley Credit Union offers a number of car loans and is happy to work with you, no matter what your credit score.