Few people can afford to purchase a vehicle outright. Even used cars cost thousands of dollars. For this reason, two-thirds of all vehicle purchases in the U.S. are financed, and 85 percent of new car purchases are financed. Many of the cash purchases are made by business entities. If you are an average American consumer, chances are almost certain you will need a car loan.
Car loans make affording such an expensive purchase much more comfortable. By providing consumers with the means to purchase the car they need within their budgets, car loans keep the economy humming. Imagine if car loans didn't exist. Many people who couldn't get a car and would be able to get to work. In that case, they couldn't even save up the money for a vehicle because they would have no income.
Despite the necessity and advantages of car loans, they come at a substantial cost to the borrower. Compared to paying cash, they add many thousands to the overall cost of the vehicle. Saving money on car loans is one of the most effective ways to make your paycheck go further.
Who Offers Car Loans?
Today's car financing market offers more alternatives than ever. Financing can be obtained through dealerships, buy-here-pay-here stores, banks, internet lenders, credit unions, and third-party financiers. One source is not better than the other. If that were so, then all car buyers would flock to that source.
The choice of lender depends on the buyer's credit and down payment, as well as the type of vehicle and where it is being purchased. It also depends on the loan type. Car loans can be secured or unsecured. Secured loans give the lender a security interest in the vehicle. This means the lender can repossess the car in the case of default. Virtually all auto loans are secured.
Unsecured auto loans are only available to people with very high credit scores, as well as significant income and assets. Lenders are willing to give an unsecured loan because they know they could recover the money from a wealthy buyer by taking him or her to court. For most people, the lender figures repossessing the vehicle is the only way to recoup any losses.
Benefits of Using a Bank
Banks provide loans with low fees and competitive interest rates. The auto loan market has lots of competition, so banks know that they need to offer good deals. Banks are robustly financed, so they are able to provide you with a loan at any time.
When you obtain a loan through a bank, you can shop around for the best rate. Most nationwide banks make this easy through online price quotes. Though these may provide good deals, don't forget to check your local banks as well, especially if you have an account with one of them. Your bank may provide discounts to their current customers.
If you belong to a credit union, you may also obtain a great deal there. Credit unions function much like banks, but they are owned by members. As a result, they often provide members with lower fees and better rates.
A bank or credit union will provide a pre-approval letter. This can be used to purchase a vehicle at any dealership.
Benefits of Using Dealer Financing
A preapproval letter gives you leverage when you walk into a dealership. The finance manager wants to get your loan business, so he or she will try to offer you a better deal. The dealer has access to loan programs from many banks. These loan programs are available to dealers only, so you may get approval for financing options you couldn't obtain on your own.
Dealers send dozens of loans to the bank at one time, and the bank will accept the loans as a package. As a result, customers with poorer credit scores often get approved for financing through a dealer when they cannot get approved on their own. Banks take riskier borrowers when they are part of a large piece of business.
Benefits of Using a Third-Party Financier
If you look in Auto Trader or on Craigslist, you are bound to find many vehicles for sale from private parties at attractive prices. You might be dissuaded by the fact that you can't afford to buy a vehicle with cash. There is no need to feel this way. You can obtain a loan for a private-party purchase through third-party financing.
Many internet lenders and car loan specific services provide for third-party loans. You would obtain a preapproval for a certain dollar amount from the third- party lender. Once you find the vehicle you want, your lender would pay for the vehicle, and you will make payments to your lender. The process is easier if you are buying from someone who has a paid-off vehicle.
Vehicle loans are a necessity for most people. It's tough to get along without a vehicle, and it's equally tough to pay for one with cash. Car loans make vehicle ownership on a wide scale possible.
Today's vehicle loan market offers alternatives for every credit type and budget. The key is to shop around with several lenders until you know what the best available rates are for your situation. With a little patience and research, you can save thousands in car loan interest.