An auto loan is a form of financing used to purchase a vehicle. A borrower can take out an auto loan from a bank, credit union, online lender or even through the dealership. By going direct, the car buyer has more control over their lending arrangement and can potentially benefit from a lower interest rate.
Lenders set their Auto Loan rates based on a variety of factors, including the borrower’s credit score, loan term and down payment. Generally speaking, the higher the credit score, the more competitive the rates will be. In addition, the borrower’s debt-to-income ratio also plays a role in their eligibility for competitive rates. A higher ratio means the borrower is carrying a significant amount of debt compared to their monthly income.
In some cases, borrowers can increase their chances of being approved for an auto loan by applying with a cosigner. This is typically a parent or trusted family member with good credit who is willing to share responsibility for the loan. In many cases, a cosigner can help the borrower qualify for an auto loan with a better interest rate and shorter loan term than what they might otherwise receive.
The type of loan also impacts the borrower’s rates. Some lenders may offer a fixed rate, while others will have variable rates. A fixed rate will remain the same throughout the life of the loan, while a variable rate can change as market conditions change.
When shopping for an auto loan, the borrower should always shop around and compare rates. It is not uncommon for lenders to compete with one another for a borrower’s business, and the car buyer can often negotiate an auto loan deal with several different financial institutions. By getting a preapproval letter from a lender before visiting a dealership, the car buyer can enter the bargaining process with confidence in knowing what their loan terms will be.
A final note on auto loans is that the car buyer should try to make a sizable down payment if possible. Down payments can decrease the loan-to-value (LTV) ratio and ultimately lead to a better rate. In addition, a sizable down payment can reduce the monthly car payment and help a car buyer stay within budget.
Considering that auto loan rates are currently low, now is a great time to purchase a new or used car. With interest rates expected to rise in the near future, a car buyer should consider a purchase sooner rather than later.
To find out how much you can afford to spend on a new or used car, consider the total monthly cost including loan payment, insurance, gas, maintenance and repairs. Then determine how much of a down payment you can afford and use that as the basis for your car-buying decision. Also, don’t forget to factor in your other monthly expenses such as rent or mortgage payment and credit card balances.