Beginner’s Guide to Getting a Used Car Loan
Buying a car can be exciting, from researching online for makes and models in your favorite color to taking the vehicle out for an initial test drive. Unfortunately, when it comes to the financial side of a car deal, things can get stressful. Even when buying second-hand vehicles are expensive investments that many struggle to afford.
Most people can’t or choose not to buy a new car outright with their own money. Financing with car loans from financial institutions is an option most people take advantage of after putting a down payment on the vehicle. While an auto loan is extremely useful, it’s important to understand exactly how the process works. There are a myriad of conditions, hidden fees, and costs that can add up quickly if you’re not fully prepared.
The more knowledge you have about car financing, the better the loan terms you’re likely to get. Many people neglect to do their research before buying a car and are rushed into agreeing on an expensive financing plan from their car dealership. Before you begin negotiations for your vehicle, ensure that you do your research on car loans and contact T&I Credit Union for trustworthy service and competitive rates.
What is a Car Loan?
A car loan is a legally binding agreement between a buyer and a lender that promises a set amount of money toward the purchase of a car. In return, the buyer must pay the lender back at a rate of interest within an agreed period. The three most important factors of a car loan are the down payment amount, interest rate, and loan term.
How a Used Car Loan Works
A car loan is a type of secured loan. This means that the lenders are protected by collateral to guarantee payment from the buyer. For auto loans, this collateral is the vehicle, and if you miss payments, the lender has the right to repossess your vehicle. Most car loans are fixed loans, meaning the payments are scheduled in monthly payments within a certain timeframe.
Agreeing on a realistic payment structure is vital to avoid financial issues or losing your car. At T&I Credit Union, we offer used car loans for up to 48 months, allowing you to pay in regular installments over four years. The payment amounts and interest rates remain the same for the extent of the loan.
Although payments are usually lower when you opt for a more extended repayment period, the long-term costs tend to be higher because of interest. If you can afford it, it’s often beneficial to pay off your car loan in a shorter period. An overly long repayment period can result in the loan outliving your vehicle.
Down Payment
When purchasing new vehicles and used vehicles, it’s common to make a down payment. This is the first payment that covers a portion of the cost of the car, with the rest of the payment covered by the lender.
Although it’s possible to secure an auto loan without making a down payment, it is not always the best option because it can result in higher interest payments, which means you are paying more over the life of the loan for your vehicle. For a used car loan, aim to make a down payment of at least 10% to get the best value out of your car over the loan term.
Interest Rates
Interest rates refer to the percentage you are charged by the lender on the money that you borrow. Financial institutions determine interest rates based on several key factors, including:
Credit score: a number between 300 and 850 is rewarded to consumers regarding their creditworthiness. The higher your credit score, the more reliable you are to a lender, so you’re more likely to receive favorable rates. If possible, it can be beneficial to try to improve your credit score before applying for a loan.
Credit history: if you have a decent credit score, your past may still come back to haunt you when it comes to interest and loan rates. Lenders look for negative incidents or red flags in your credit history. Factors that can affect your interest rates include bankruptcy, prior vehicle repossessions, and missed payments.
Loan term: the length of the loan influences the interest rate. Short-term loans generally have lower interest rates but higher payments. Long-term loans tend to have higher interest rates but lower payments.
Down payment: the higher the down payment, the less interest you’re likely to have to pay.
Loan Terms
It’s important not to overlook the length of the loan. While a long-term loan means lower payments, they add up over time and can mean you’re paying more for your car over the life of the loan.
While shorter-term loans typically require higher payments, it can be beneficial to complete your loan quickly and gain ownership of the vehicle. Determine what you can afford and the size of payment that can easily fit within your monthly budget.
What to Do Before You Apply for a Loan
Before sending a car loan application, the first thing you should do is check your credit score and try to boost it. There are three major credit reporting companies in the U.S.: Equifax, Experian, and TransUnion. You can ask for a free credit report every year from any of these agencies.
During the months before applying for the loan, take the necessary steps to improve your score. This includes not opening new credit cards or taking new loans and paying all your credit card bills on time.
If you have several separate debts, a debt consolidation loan can result in lower interest rates and a lower monthly payment, freeing up more money for other things like your car payment. If you plan ahead before buying a car, this strategy can help you make all your monthly payments on time and improve your credit score. T&I Credit Union currently offers debt consolidation loans up to $10,000 at 5%, 6%, or 7% APR.
Many people have a credit card, but they don’t know how to improve their scores. One of the benefits of being a T&I Credit Union member is that you have access to a free credit score analysis. A member of our team can look at your credit history and find ways to help you improve your score.
If you have a poor credit score that you can’t improve in the short term, there are other strategies you can use to secure loans now. One way is to find a co-signer with an excellent credit score. This makes the loan less risky because somebody is taking the responsibility if you default. Having a co-signer is a big responsibility because if you fail to pay the loan, they are responsible for the debt.
How to Apply for a Used Car Loan
Before applying for a used car loan, do your research and look around for the lowest interest rates. One way you can do this is to speak with different lenders and see who offers you the best deal.
Using the interest rate, you should calculate the monthly payments you will have to make. Make sure the monthly amount you’ll have to pay is within your budget, so you don’t run into financial problems. An online auto loan calculator can help you determine the approximate monthly payment you’ll owe based on your interest rate and down payment amount.
To get a better estimate of the interest rate and monthly payment, getting a pre-approved loan from a lender is a good idea. A pre-approved loan can also work as a negotiating tool in a car dealership. The car dealer might make you a better offer than your pre-approved interest rate, saving you money.
To get pre-approved for a loan, you will need proof of income (W-2 or pay stub), proof of assets (bank or financial statements), employment verification, your driver’s license, and your Social Security Number. You can apply to T&I Credit Union for a pre-approved loan through our website.
Get in Touch With T&I Credit Union for More Information
At T&I Credit Union, we are committed to improving the financial lives of our members. As a trusted Michigan credit union that operates across several cities, we can provide you with the financial help you need. For more information, call us today at (248) 397-9571.