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What You Need to Know About Car Loans

What You Need to Know About Car Loans

When it's time for your next car, odds are that you'll be taking out a car loan to cover some of the costs. It's a good idea, then, to understand exactly what you're taking on when you sign the dotted line. If not, you could face budget problems or worse; loan delinquency can lead to serious problems. Head off any potential issues with careful planning and research. Making the right decisions about the type of car and loan you select will help you maintain a healthy monthly budget. Understanding how your credit score affects potential lender rates can also help you save money in the long run. Check out our guide and discover what you need to know about car loans.

Where Do Car Loans Come From?

So, where do you get a car loan, anyway? For simplicity's sake, it's not unusual for buyers to get a car loan directly from the dealership where they found their new car. Depending on the rate your dealership is offering, this can be a great option for buyers who are crunched for time.

However, you do have other options. Many financial institutions offer car loans. If you already have an account, it's easy to apply for a car loan through a particular bank or credit union. Banks and credit unions often offer exclusive deals for their members, so this can be a good way to land a reasonable APR. You can also apply for loans through banks and credit unions where you don't have an account, depending on the institution.

Note that while banks are in this business to make money, credit unions are non-profit institutions. Perhaps unsurprisingly, credit unions offer highly competitive APRs, potentially saving you a lot of money in the long run. However, credit unions tend to put restrictions on their services, such as only offering loans to members, students at a particular school, or employees at a particular company.

Choose the Right Lender

The best loan option really depends on the customer. You may want to forgo a slightly better APR from a credit union in favor of a car loan from a better-established bank. An established financial institution can offer greater peace of mind as well as large-scale customer service operations.

When you finally find the perfect used car, you may want to save time and simply sign up for the dealership loan. If that's the case, make sure you find out what financial institution is behind the loan - it may not be the dealership itself.

What's on Your Credit Report?

When you know your credit score, you also know what you can expect in terms of interest rate offerings. It's easy to learn your credit score, thanks to non-profit services like Credit Karma. Some credit card companies, such as Discover, help customers keep track of their credit score from their online accounts.

You can also use this information to obtain pre-approval from your lender of choice. With pre-approval, you'll arrive at the dealership knowing how much you can spend and only test-drive the cars that you know you can afford. Pre-approval also gives you leverage at the dealership. You can always ask your dealer's financial department if they can give you a better deal on a car loan. Perhaps the dealership can loan you extra money so you can upgrade your purchase or a lower APR to increase savings.

Should you find that you have a low credit score or no credit at all, you still have options. These options include subprime loans or buy-here-pay-here dealership loans. These types of loans tend to cost more in the long run, however. If you can, it's a good idea to improve your credit score before seeking a car loan so that you can negotiate better terms.

Read the Fine Print

Your car loan will feature a unique interest rate, repayment period, and monthly payment. Make sure you understand how long you have to repay the loan, how much it costs each month, and how much you will have paid at the end of the repayment period.

If you plan to purchase a new car, you likely already have a solid credit score. You'll also be pleased to learn that new car loans typically offer lower interest rates. By purchasing a used car, you'll save more on the cost of car ownership, but you'll likely find that used car loans come with higher interest rates.

Before you sign your lender agreement, read the find print. Buying a new car is exciting, but it shouldn't keep you from carefully considering your financial options and weighing them against your current budget!