Auto Financing 101
What Is Auto Financing, and How Does It Work?
Buying a new car is exciting, but finding the best financing deal is far from it, even if you've done it before. Figuring out all the numbers and reading the tiny details in a car loan agreement is not as fun as testing the chomps of a new Chevy Silverado 1500. But if you take the time to understand everything before you sign on the dotted line, you'll have a better experience owning your car. Keep reading, and this guide will teach you everything you need to know about how to finance a car, so you can make sure you're getting the best deal for you.
Most people already know what auto financing is, but if you don't, auto financing is how you can buy a car by borrowing money and then paying it back little by little. More than 84% of new cars are bought this way, according to Statista.
Here's how it works: a bank, credit union, or another lender gives you the money you need to buy the car right away. Then, you pay them back every month, with interest, over a certain amount of time. The interest rates, how long you have to pay back the loan, and the rules you have to follow are the main parts of a car loan.
Interest Rate: This is what you pay extra for borrowing the money, and it's shown as a percentage. Interest will continue to accrue for as long as you still owe money on the loan.
Loan Term: This is the length of time you have to pay back the loan. When you get a car loan, you usually have to pay it back in 36 months (three years), 48 months (four years), or 60 months (five years).
Conditions: These are the rules you'll have throughout the duration of the loan term. The rules might include things like extra fees for late payment or special rules about paying off the loan before the term is up. It's important to understand these conditions, so you know what you're agreeing to when you borrow the money.
Types of Auto Financing
There are many ways to pay for a car, and each one has its own good and bad points. Here's a look at some common ways to finance a car:
- Secured Auto Loans: These are loans where the car you're buying is used as a guarantee. If you don't pay the loan, the lender can take the car back. These loans often have lower interest rates, but you usually have to make a down payment.
- Unsecured Auto Loans: These loans don't use the car as a guarantee. The lender looks at your credit report, income, and residential history to evaluate your eligibility for the loan. The interest rates for unsecured loans are usually higher than secured loans. This type of loan is a good option if you're a car buyer with low credit or if you can't make a down payment.
- Lease Financing: Leasing is like renting a car for a set time, usually 24 or 36 months. When the lease is up, you can return the car, buy it, or rent a new one. This might have lower monthly payments, but generally, you don't get to keep the car at the end of the lease. Some lease agreements allow you to pay the remaining worth of the vehicle when the lease is over, at which point you would need to look for another form of financing.
- Auto Refinance: This means getting a new loan to pay off your old car loan. This can be a good idea if your credit has gotten better or if you want a lower interest rate.
- First-Time Car Buyer Loans: These loans are for people buying their first car. They might have lower interest rates, and there might be perks like no application fees or a smaller down payment needed.
It's important to think about what works best for you and your situation, so you can pick the right way to pay for your car.
Factors that Affect Auto Loan Rates
Several things can affect how much your car loan costs:
Credit Score: Usually, the better your credit score, the less your interest rate will be. Other things like how much debt you have compared to your income might also be considered.
Loan Term: If you choose to pay back the loan in a shorter time, you might get a lower interest rate. But that could mean higher monthly payments. Even though you're paying more each month, the overall cost of financing will likely be lower because you're paying it off quicker and thus accruing less interest.
Age of the Vehicle: New cars often cost less to finance than used ones. This is because lenders view new cars as less risky, since they're less likely to break down. Also, carmakers and dealers might offer special low rates for new cars that they don't offer for used ones.
Down Payment: The more money you can pay upfront, the less your interest rate might be. That's because you're borrowing less money. Some people trade in their old cars and use that money as a down payment. You can use tools like our "value your trade" tool to see how much your old car is worth.
Understanding these factors can help you find the best loan for your situation so that you can get a good deal on your new car. It might seem complicated, but taking the time to learn about it can save you money in the end.How To Compare Auto Loan Rates
Comparing auto loan rates can save you a lot of money. Get quotes from several lenders and compare their interest rates and terms. Be sure to look at the annual percentage rate (APR), which includes the interest rate and other loan costs.
Comparing auto loan rates can put extra money in your pocket. How? By getting quotes from several places that lend money, like banks or credit unions, and looking at their interest rates and the terms of the loan.
Make sure to check the annual percentage rate (APR), too. This rate includes not just the interest but other costs of the loan as well. By looking at the APR, you can really see how much the loan is going to cost you.
Finding the best deal on your auto loan can make buying your car a lot less expensive in the long run.
How to Get Pre-Approved for an Auto Loan
Getting pre-approved for an auto loan before you start shopping for a new vehicle can give you a lot of peace of mind during the process. It helps you know exactly what you can afford and lets you shop with confidence. It's like knowing how much money you have in your pocket before you go to the store. You'll know what cars you can afford, so you don't waste time looking at ones that are too expensive.
To get pre-approved, simply apply with potential lenders. You'll need to provide them with information about your financial situation, like how much you make, where you work, and what your credit score is. Then they'll tell you how much they'll lend you and what the interest rate will be.
At Amigo Chevrolet, getting pre-approved is easy. Just fill out a quick online form, and our finance department will help you review the financing options you qualify for. That way, you can pick the best one for you and start shopping for your new car right away.