Over $500 billion a year is loaned out on cars, so it’s a big business. There are several loan options you might want to consider.
The monthly loan payment is probably the item that concerns you the most. Many things will affect that amount including:
- The down payment- Whether you’re leasing or buying, the more money you can put down on the car, the less you will have to borrow. For example, if you put $2,000 down on a car that costs $22,000, your loan amount will be $20,000. If you put $4,000 down on it, the amount you borrow will be $18,000.
- The amount you borrow- The lower the amount you borrow, the lower your payments will probably be (unless you want to pay the car off quickly). For example, using the loan amounts above, if you borrow $20,000 for a seven year period at 7% interest, your monthly payment will be $301.85.
If you borrow $18,000 for the same period and interest rate, your payment would be $271.67.
Another factor to consider is that the less money you borrow, the less, including accumulated interest, you have to pay back.
- The interest rate- If you borrow $20,000 for a seven year period at 7% interest, your payment will be $301.85 as you saw above. If you borrow the same amount for the same period at 8% interest, the payment would be $311.72.
- The loan period- The longer the period, the lower the payments. For example, if you borrowed $20,000 for a seven year period at 7% interest, your payments would be $301.45. If you borrowed the same amount at the same interest rate but for only five years, your payment would be $396.02. So, your total payout would be less and obviously the loan would be paid off sooner with a shorter term.
Where to Get an Auto Loan
There are several sources where you can obtain an auto loan. You can try your bank or a credit union. The most convenient place to obtain one is at the dealer where you purchase the car.
One thing to be aware of is that in general, the interest rate on dealer financed loans is higher than on money borrowed from a bank, credit union or home equity. The reason for this is that while the rates are based on your credit score, extra points or fees may be also be added at the dealership.
The best deal you can probably get is to fund your car purchase with a home equity loan. If you do this, you will be able to take advantage of a lower interest rate. You may also be able to deduct the interest generated on the loan when calculating your personal income tax.
As with purchasing a home, it may be a good idea to obtain a pre-approval from other lenders before applying for a car loan at a dealership. You can do this on the internet or with your own lending institutions. Then, you have some leverage when discussing a possible dealership loan.
Auto Refinancing Loans
This is very similar to refinancing your mortgage. If the current interest rate for car loans is lower than what you’re currently paying on your car note, you might want to consider this.
What car refinancing does is pay off the old loan. The title is then transferred to the new lender. If your goals are to reduce interest payments or to decrease your overall payment this may be an option for you.
Car leases vs Car Loans
With both a car lease and a car loan, you’re making a payment. However, there are some differences in the way each finance type is structured:
Loan- You own the vehicle at the end of the finance period
Lease- You must return the vehicle at the end of the lease or buy it
Loan- Payments are higher because you’re paying for the entire vehicle
Lease- Payments are usually lower because you’re only paying for the amount of depreciation that occurs during the lease period
Loan- You may have to trade-in or sell the car if you decide you want another one after the loan has been paid off
Lease- You can return the car, pay any end-of-lease costs and walk away from the vehicle if you want to get a new vehicle
You can see that as with any major purchase, there are many factors to consider in obtaining the right loan for your vehicle. It pays to perform due diligence and get the best deal.