Picking out a new car is one of the most exciting purchases a person can make. Typically, folks are not paying cash in full for a vehicle, making financing an important piece of the decision-making process. We’ve looked through rates, terms, loan options, customer reviews, and overall quality to find the best auto loans.
What to look for in an auto loan lender?
A variety of factors go into the auto loan process. Lenders will change the baseline of these factors depending on each borrower. Some of the common details to look out for are:
- Annual percentage rate (APR): The biggest driver when looking for the right lender. The APR is the interest added to the loan and may be fixed or variable. All lenders are required to disclose the APR and may differ on the offered APR depending on the individual’s down payment and credit score. Fixed rates are common in the auto industry, so finding a lender with variable rates only may put the excess on the loan.
- Repayment: Early payoff penalties are important to understand prior to picking a lender. If the lender has these types of penalties, continuing to shop lenders is suggested.
- Downpayment: Fees are driven by interest rates; lenders will allow borrowers to lower interest rates by paying upfront for the percentage savings. At times this may be a viable option for savings if the loan term is extended. Reviewing the total loan amount and changing the APR is helpful in ensuring if up-front payment is necessary.
What are the requirements for an auto loan?
- Proof of income: Lenders will require borrowers to show a steady stream of cash flow. Pay stubs are the simplest way to show proof; however, it will be required in most cases to have a recent pay stub within 30 days of applying for an auto loan.
- Proof of residence: The lenders are looking for proof of residency at the address stated. The loan application will need to match the address on a driver’s license and/or a piece of business mail.
- Proof of insurance: This is a legal requirement to have adequate insurance coverage prior to loan issuance. Bringing in current insurance cards is the easiest way to resolve this requirement. If this is a first-time car purchase, a call to an insurance company while at the dealership is possible to gain coverage; however, this doesn’t allow shopping at different insurance rates.
- Identification: Multiple proofs of ID are required. A driver’s license, Passport, or government-issued ID is necessary. A current bank statement or utility bill with an address will be needed to prove current residency.
- Credit and financial history: Lenders will look at the capability of a borrower to pay in full. Credit score and debt-to-income are the main drivers at looking into this history. This information is attainable by the lender with a borrower’s signature. Be warned any type of look into an individual’s financial history will be reported to the Credit Bureau and is seen as a hit on the account.
- Vehicle history: Vehicle history is specific to used car shopping. Lenders will want information on the vehicle prior to approving a loan. The year, make, model, mileage, and a check for any liens are necessary. The lender is ensuring the loan offered has the collateral of value carried by the vehicle.
- Trade-in documentation: Trading in an old car may help with down payment and lower the overall loan amount. Bringing in the title and registration will help streamline the trade-in process.
What are the different types of auto loans?
- Secured auto loans: The bank uses the vehicle as collateral for repayment of the loan. As long as the borrower keeps payments current, no action will be taken by the bank. If payment falls behind, the bank has the right to repossess the vehicle. When the loan is paid off, the bank will release the lien against the vehicle and in some States mail the vehicle title to prove ownership.
- Unsecured auto loans: The exact opposite of secured loans. The lender does not carry a lien on the vehicle, and they cannot repossess the vehicle with payment delinquency. The lender does have the capability to use credit agencies for garnishing wages to pay the loan. These loans typically carry higher interest rates with stricter approval rules for borrowers.
- Simple interest auto loans: Allow borrowers to pay ahead as they would like. These loans typically have interest accrual daily and borrowers may pay as they see fit throughout the month. The only stipulation is the monthly payment must be met in full by the end of the month. This is a popular loan due to the flexibility a borrower has on principal payment and ultimately the reduction of total interest paid on a loan.
- Pre-computed auto loans: Pre-computed loans have scheduled payments that are already determined by the lender. The scheduled payment has exact dollars associated with the principal and interest of the loan.
- Lease buyout loans: A lease buyout loan happens when the borrower wants to keep the car after expired leased payment terms. The lender will pay the buyout fee for the car and the borrower will make fixed payments like a secured auto loan. The lender will place a lien on the vehicle until paid in full.
What are the costs of an auto loan?
The overall cost of an auto loan will differ based on a variety of factors. Credit score and debt to income are major drivers in the overall interest rate given for an auto loan. These aspects will change the overall loan amount. The loan amount is the total amount of money being lent with taxes, fees, add-ons, and APR.
How to choose the best auto loan?
Making an auto loan decision comes down to three factors: interest rate, loan term, and monthly payment.
- Interest rate: A major deciding factor is the interest rate. Shopping a variety of lenders is essential to find the best rate. Auto dealerships will carry their own lenders and may on occasion offer introductory APR as low as 0% with certain terms met.
- Loan term: The total count of payments on the loan. Typical loan terms will range from 36-72 months. The shorter payment terms lead to a higher monthly payment but less interest paid overall.
- Monthly payment: Personal budget planning prior to financing a vehicle is essential. Blindly looking at auto loans and not understanding the monthly spending may lead to repossession of the vehicle if payments are not met.