Shopping for a new car can feel overwhelming, especially if this is your first time buying a car. You may have already spent time researching cars and know a little bit more about what you’re looking for, so it’s time to start exploring how you’ll finance your car purchase. We’re here to help you learn more about auto loans and help you through the process.
What is an Auto Loan?
An auto loan, also referred to as a car loan, is when you finance the purchase of a vehicle. Auto loans can be used to purchase new and used vehicles. A lender, like Wasatch Peaks, provides the money for the vehicle upfront and then you, the borrower, will pay back the full loan amount to the lender, plus interest. This is typically paid back with monthly payments.
Loan Factors to Consider
Loan Amount. The loan amount is the amount of money you need to fund the purchase of your vehicle. Lenders will have a limit on how much you can qualify for and how much of the vehicle’s value they will finance. This amount will be a major factor in the monthly payments of your loan.
Annual Percentage Rate. Typically referred to as APR, the annual percentage rate is the interest rate on your auto loan. This will determine how much interest you’ll accrue and pay throughout the life of the loan.
Loan Term. The loan term is how long the loan will last until it has been paid back in full. Auto loan terms are usually between 32 and 72 months.
Where to Get Financing
Direct: Direct lending is when you get your auto loan directly through a financial institution, like a bank or credit union. These institutions can get you a loan if you’ve already found a car or get you a pre-approval on a loan so you know exactly what you can afford before heading to a dealership. Be aware that if you are looking for direct financing that not all financial institutions will charge the same rates. Credit unions are known for offering lower fees and interest rates because they are responsible to the members, rather than shareholders and investors.
Indirect: Indirect lending is typically done at the dealership where you’re purchasing the vehicle. The dealership will often offer different loan options from their network of lending partners, which usually consists of banks and credit unions who will provide the salesman a commission for loans. This does allow you some room for negotiation in your interest rate and terms, so keep that in mind as you speak with your salesman.
Related: 6 Reasons to Get a Car Loan Through a Credit Union
How to Apply
Applying for an auto loan is a fairly straightforward process. You’ll need to fill out an application for the lender, which usually includes basic information about yourself and your employment. Lenders will also require ID and at least your 2 most recent pay stubs to verify your employment. Once you have all this completed, your lender will do a credit check.
With all of this information, the lender will then determine how much you can qualify for on your loan and options for the payment and loan length. It can save you a lot of heartbreak to get a pre-approval before deciding on a car in case you are unable to qualify for a high enough loan amount to purchase the car you want. Once you’ve decided to proceed with your loan, you’ll need to sign the paperwork agreeing to the loan terms and then you’ll receive a check for the funds!
Some lenders, like Wasatch Peaks, will even allow you to apply online for loans. You can view our application through the link below:
Tips for Saving
1. Improve Your Credit
Your credit score represents your risk and responsibility to a lender. Those with higher credit scores will typically receive the best interest rates on their loans. If you do have a lower credit score, making your payments on-time and regularly for several months can help boost your score.
2. Compare Payment Options
Before agreeing to the terms of your loan, make sure that you’ve looked into all your available payment options. A lower payment may be nice each month, but you could potentially be paying a lot more in interest over the long term. On the other hand, a payment that is too high for you monthly could possibly be extended over a longer time and put you in a better position to purchase the vehicle.
3. Pay Extra
Whether you pay more upfront on your down payment towards your new car or you want to pay extra towards your payment, you’ll save money over the life of the loan! With a lower loan balance, less interest will accrue throughout the loan, saving you money. Before making extra payments or putting extra funds towards your monthly payment, check with your lender to see if they charge any fees for either.