Your Guide to Auto Loans
William "Billy" Durant was the first man to see that the auto industry was going to take off if people could afford a car. Durant himself was not a huge fan of cars, but he saw that others were. Durant founded General Motors. He organized GM and McLaughlin-Buick. He is the first man to introduce financing in the form of General Motors Acceptance Corporation; GMAC. Since 1919 GMAC has been providing loans to people so that they can have the car of their dreams.
Today there are many more auto financing companies. From small businesses to Internet based companies you can find an auto loan following a myriad of different roads.
What is an Auto Loan?
An auto loan is the money that you borrow from a financial lender to cover the cost of the car. The cost is then broken down into monthly payments that fit your budget.
Where Can I Get an Auto Loan?
Auto loans come from several places such as:
- From the Dealership: Convenient way to get a loan, though you can suffer additional costs.
- From the Bank: You will find competitive rates and usually you will have the option of adding life insurance, though not as convenient due to bank hours.
- On the Internet: You have the option to shop around without the high pressure pitch.
How Is the Cost of an Auto Loan Determined?
Auto loans will vary greatly depending on the financing options. When you look for an auto loan, the price can fluctuate when compared to a when a friend is looking for an auto insurance rate. This fluctuation is due to the fact that everyone is different. Your auto loan rate is determined based on several factors including:
- Your credit score
- The term (# of years) that the loan will last
- The newer the car the lower the rate
- Your location: big city versus small town
What is a Dealer Rebate?
A dealer may offer to give you a low interest rate or a rebate. While an interest rate of 1% may sound interesting a rebate may actually be the better deal in the end. If you were to go with a 1% interest rate on a car that cost $15,000 for 24 months and you put $3000 down, that means you are financing $12,000 for the car and $125 for financing which makes your monthly payment $505. However, if you go the bank and they say your interest is 8% but you get a $1500 rebate off the price of the car your payments would be less. The cost of the car is $15,000, minus the $3000 down and $1500 rebate, which means the car, costs $10,500. After the 24 months the finance charge is $916. Your monthly payment on the cost of $11,146 will be $475. You will save about $979. This is why you need to shop around.
How Do You Determine Your Budget?
When you are shopping around for auto insurance you want to be aware of your budget. A new car is great, but if the cost of an auto loan is too high you will not be able to afford auto insurance, much less gas and you will not be able to go anywhere. When calculating your budget you need to look at the price of the car with the added features and benefits and the added insurance percentage. Take this number and divide it by the term of the loan. Remember, the shorter the term the better.
Where Do I Shop for an Auto Loan?
As we mentioned above there are plenty of places to shop for a loan. You want to talk to your bank, talk to your insurance provider and talk to the dealer. What you want to do is talk. You do not want to go all over the place applying for a car. When companies run credit inquiries on you it can show up on your credit report. If you have many inquiries in a short period of time your credit score can go down. A low credit score will negatively affect your auto loan cost.
What Should You Look For In a "Good" Auto Loan?
You want to have the right term, low interest and right payment for your budget. Be sure that there are no penalties for paying off the loan before the term ends. You do not want to have to pay an extra fee because you are able to pay off your loan sooner.
Why Would I Need an Auto Loan?
Unless you have the cash in hand to buy that new car, you need an auto loan. Enjoy the freedom that a car allows and you will not go broke if you budget well.