If you’re dreaming about sitting behind the wheel of your brand-new ride, then it’s time to take the first step in the process. Nope, the answer is not “visit nearby dealerships.” There’s an even more important first step. It’s time to find an auto loan.
If your plan is to purchase a vehicle from a dealership, then you likely won’t be prepared to make the purchase outright. Vehicles are expensive, so you will need an auto loan to supplement your down payment. And just like any large purchase, you’ll want to make sure you’re getting a great deal.
Dealerships are often ready to provide an auto loan, but is that the best way to go? Here are five tips for choosing an auto loan company that you’ll want to take into consideration before you even step foot in a dealership.
1. Interest Rates
Just like any loan, you’ll want to secure the lowest interest rate possible. Interest is money owed to a lender that is calculated based on the amount you borrow. This is an inevitable result of borrowing money and increases the overall amount you will pay for the vehicle, so you’ll want to do some looking to find the lowest rate you can.
The interest rate is based on a number of factors, which include the amount you request to borrow, the length of the loan, the institution you secure the loan from, and your personal credit history. Currently, the average rate you’ll find is 4.21% for a 60-month loan, but it can easily rise to 10% or higher. For this reason, your best bet is to shop around. Note, however, that the lowest rates you’ll find will often be at credit unions.
2. Monthly Payment & Length of Loan
Top of mind for you when choosing an auto loan is likely the monthly payment, as this number will inform whether you can afford the vehicle you want. However, it shouldn’t be the only consideration, because adjustments can be made to your loan to lower your payment.
If you aren’t prepared in advance, you might walk into a dealership, select a vehicle you don’t think is in your price range, and learn that you can actually afford the monthly payment. But if the interest rate is high and the length of the loan is 10 years rather than 5 years, you’ll end up paying much more in the end, even if the overall monthly payment is affordable.
In fact, you may even become upside down on a loan like that. This refers to owing more on the loan than the vehicle is worth.
To avoid this situation, it’s recommended you play around with the numbers on an online auto loan calculator. Enter the cost of the vehicle, your expected down payment, your interest rate, and the life of the loan to understand what you can afford before you shop. Try this one out.
3. Prepayment Penalties
Since a company makes money by charging you interest, it makes sense that many would want you to be paying off your vehicle as long as possible. That’s why, when choosing an auto loan, you should check to see if there is a prepayment penalty.
A prepayment penalty is a fee charged to you if you pay your loan off early. While it’s completely acceptable to pay just the required monthly payment on your auto loan, should you come into added funds and pay off your loan early, you should not be penalized. So make sure, before signing on the dotted line, this won’t happen if the opportunity presents itself.
4. GAP Coverage & Other Offerings
When choosing an auto-loan lender, you should not just consider the product, but all offerings the lender can provide. GAP, or guaranteed asset protection, is great additional coverage you should consider on top of insurance if you are applying for an auto loan. It pays you the actual cash value (ACV) of your car and the outstanding loan balance if your vehicle is totaled.
While you may be thinking this will never happen to you, vehicles are totaled on a regular basis, and it’s not always the fault of the auto loan holder. But if you don’t have this coverage, you will still be responsible for the balance on your loan.
If you choose to add GAP through a lender like Central Willamette Credit Union, you will also receive $1,000 down payment toward a new vehicle, as long as it’s financed with that lender within 90 days of the first vehicle being totaled.
When an auto loan company offers GAP coverage or other products, like car refinancing, you’ll know you’ve chosen an experienced, top-notch lender.
5. 100% Financing of New & Used Vehicle
If you’re still shopping around for an auto loan, you may not know definitively if you want a new or used vehicle. You should then make sure your lender of choice is ready to finance either. Additionally, make sure it can finance the entire vehicle. Even if you want to put money toward the purchase, this shows credibility.
In fact, Central Willamette Credit Union will finance 100% of the cash sale price of a new vehicle and up to 120% of the MSRP at a fixed rate on new and used vehicles for up to 84 months, and even offers flexible financing and great rates on third-party auto loans.
Selecting a lender that has various options will make for a smoother decision when you arrive at the dealership. You’ll have the confidence to make the decision that best meets your needs and budget.
Choosing an auto loan company requires some research before making an educated selection, but these five tips will make the process easier. Once you know how each lender matches up against these points, you’ll be ready to apply for preapproval and be on your way to pick out your new car in no time.