Here’s a recent headline from Forbes that kinda says it all:
Cars Are Costing More Than Ever To Purchase, Finance, And Own, Yet Consumers Remain Unfazed
On the one hand, here’s to capitalism and an American economy that allows you to purchase the vehicle you need (or at least want) through creative financing and good ol’ competitive lending. On the other…
Consumers are coping with rising prices and financing costs largely by extending their car-loan terms… Unfortunately, on average, for every 12 months a car loan is extended it will cost an owner nearly $1,000 in additional finance charges.
Ouch. And it doesn’t stop there.
Due to rising interest rates and other factors, the AAA says the average yearly cost of vehicle ownership has likewise risen to a record peak at $9,282, or $773.50 a month. Higher financing rates account for 40% of the rise in overall ownership expenses…
You get the idea. What does this mean for you as you consider your next vehicle?
I’m In Love With My Car
It’s not like most of us can simply do without. Sure, Americans in larger cities can get along quite contentedly with public transportation. And maybe a bicycle or Segway or something. For the rest of us, however, we pretty much have to have a car or truck. Otherwise, we can’t get to work, take the kids to soccer practice, and buy groceries. Just as important, our car is where we listen to our music or enjoy our podcasts. It’s where we think our own thoughts and process our day. It’s more than transportation – it’s a refuge.
So let’s assume you gotta have a vehicle. Statistics say they’re getting more expensive and people are paying more to finance them. How do you secure a car or truck that meets your logistical needs and maybe fulfills at least a few of your auto-related hopes and emotions, all without taking on unnecessary debt or getting yourself into credit trouble?
Let’s talk about logistics before you run out and start test-driving anything.
How Do Auto Loans Work?
It sounds like a silly question, but it’s something many people don’t adequately consider before they find themselves sitting in some salesperson’s office talking about whether or not they need to add on the upholstery protection package.
Where Can I Get A Loan?
Because of the cost of most automobiles, new or used, it’s traditional for buyers to finance vehicle purchases. This can be done in several different ways. Your local bank or credit union probably have published rates for automobile loans. You can even get pre-approved so that by the time you actually go car-shopping, you know how much you can afford to spend and approximately what sort of monthly payment you’d be committing to.
In the 21st century, there are numerous online auto lenders as well ready to compete for your business. Some even specialize in used car loans or auto loans for bad credit, for example. Auto loans online have the advantage of efficiency – you can usually go through the entire process without leaving your house, and approval times tend to be faster than with traditional lending institutions.
Interest rates for online auto loans are very competitive since many online lenders are designed to be efficient and operate in very competitive conditions. You won’t be sitting across a desk trying to persuade a guy in a suit that you’re worthy; online lenders will be working to earn your business and keep you happy. That’s how they succeed. We’ll talk more about how to find the most reputable and reliable online lenders in a moment.
How Does The Loan Work?
Traditional auto loans (including online auto loans) are term loans at fixed interest rates. That means that once you’re approved, you’ll be presented with a fixed number of monthly payments at an unchanging interest rate until the vehicle is paid in full. The advantage to this is that there are no surprises – your payments come due at the same time every month and stay the same throughout the life of the loan.
That doesn’t mean there are no variations. Or that it’s impossible to make adjustments if your circumstances change. But unless otherwise specified, auto loans are pretty straightforward. Be aware, however, that any number of things can influence just how much that monthly payment might be. You may also encounter some very tempting alternative forms of financing. In such cases, it’s all about the details. You might save thousands, or spend thousands more in unexpected fees or additional interest. Always pay attention to the specifics, and don’t hesitate to ask questions!
How To Get An Auto Loan
On the one hand, as we discussed above, most auto loans are fairly straightforward in terms of how they’re structured. On the other, there are several considerations you should be aware of before you get too far in the car-buying process. So let’s see how can you get an auto loan.
The first – and it’s a big one – is the question of where you want to finance. There are three basic options: a local bank or credit union, one of the many online lenders available in the 21st century, or the dealership where you purchase your vehicle. For either of the first two, it’s usually wisest to talk about your options before you shop for a specific vehicle. Most local banks and credit unions, as well as lenders specializing in online auto loans, have procedures by which they can pre-approve you for a specific amount. That way, by the time you’re actually shopping, you know exactly how much you can afford and what you’ll be paying monthly if you decide to commit.
You’ll want to be prepared with documentation of things like your income over the past year, employment information, and other basics. While it may not be essential at this stage, you should at least be thinking about whether or not you’re likely to trade in your existing vehicle or make a substantial down payment on your new purchase. Finally, you should have a pretty good idea whether you’ll be focusing on new or used vehicles as you shop.
Online Auto Loans
Exploring your online options can be a bit daunting without guidance. We do many things here at Loanry, but one of the biggest is connecting borrowers with reputable online lenders. Don’t worry, we’re not going to charge you for anything, and we don’t loan money ourselves. Instead, we gather some basic information about who you are and what you’re looking for. We can help you get your own copy of your credit scores or even your full credit report absolutely free. Our online tools, such as our online loan calculator, can even help you play with the numbers ahead of time so you feel more confident going in.
There are several advantages to online auto loans. The most obvious is that the entire process takes place online. You can do it any time of day or night from wherever you happen to be. Who would have thought only a generation ago that you could receive multiple offers from lenders competing for your business while sitting in your underwear in the middle of the night eating Corn Nuts?
That’s not required or anything, but it does highlight the convenience of online auto loans. Those Corn Nuts probably aren’t doing your keyboard any favors, though.
If you have a decent credit history, online auto loans tend to offer very competitive interest rates and other terms. You may have the pre-approval or the money in your account as early as the next day
What Role Does My Credit Play When I Want an Online Auto Loan?
The short answer is “a big one.”
Your three-digit credit score and your credit history are major factors in whether or not lenders are willing to extend you the loan you’re seeking for the car or truck you want. Now for those of you who aren’t familiar with credit scores. There are two common forms of this magical number – the FICO and the VantageScore. While computed slightly differently, each results in a number between 300 – 850. This acts as a “snapshot” of your overall creditworthiness for lenders. Each one considers your payment history, your current debt or debt-to-credit ratio. And overall reliability when it comes to various forms of credit extended to you in the past.
Auto lenders, including those specializing in online auto loans, sometimes modify these numbers to give extra weight to your auto loan history specifically. After all, they’re primarily concerned with whether or not you’re likely to pay for the car or truck you’re trying to buy. Not your track record with your landlord, the credit card companies, or your past due medical bills. It’s not that those things don’t matter. But sometimes your payment history with the same sort of loan they’re considering extending to you matters more.
The advantage (and arguably the major limitation) of a three-digit credit score is that it’s straightforward and easy to compare to whatever internal charts or tables a lender might use to determine what sort of interest rate to offer you, or whether to offer you a loan at all. Some lenders, particularly those offering online auto loans, want to look a bit deeper. They’re looking for reasons to say yes, not reasons to turn you down. In that case, they’ll probably look at your full credit report.
Your credit report has a detailed history of every loan you’ve ever taken out and how you did repaying them. It will show your employment history, where you’ve lived, and all sorts of other details about you. If you had a rough patch several years ago, but have been regularly employed and paying your bills on time more recently, that will be easier to establish with a credit report than simply looking at a credit score. If you’d like to know more about the role of your credit in financing a vehicle, my colleague Julia Peoples elaborated about it recently in a piece well-worth checking out.
Online Auto Loans With Bad Credit
A rocky credit history will make any loan more difficult, but it doesn’t necessarily disqualify you from getting the car you want. Many online lenders specialize in loans for people with bad credit, or with very little credit history at all. Be aware you will probably be looking at a few fees upfront and possibly stiffer penalties for any late payments. Interest rates will be higher as well because the risk to the lender is greater. Make sure you’re OK with the terms and that you can realistically make your monthly payments for the life of the loan before committing, even if you really really really want this vehicle!
If you do choose to move forward with the loan, be aware that every payment you make – or don’t – impacts your credit rating and overall credit history. Online auto loans for bad credit can be an opportunity to not only drive away with the car or truck you’ve been wanting, but to rebuild your credit and establish a positive history with a lender you may wish to utilize again someday.
There are other options to consider if you have less-than-perfect credit. You can use these in conjunction with whatever loan you manage to negotiate or try one or all of them separately.
The first option is a co-signer. This would be someone with a strong credit history who trusts you enough to put their credit rating on the line to help you out. If you make your payments as scheduled, your credit record improves without any change to theirs. If you don’t, their credit record is damaged and they may eventually be expected to pay what you’ve promised. That makes this a big deal and not something to be taken lightly. Money matters, but so do relationships, yes?
The second option is to make a substantial down payment. There’s a difference between having a shaky credit history and being completely without resources. Saving money isn’t always easy, but even a few thousand dollars down can make a huge difference in your monthly payments, interest rates, and even the willingness of lenders to take a chance on you. This tends to be true of traditional lenders as well as online auto loans.
A third option is to challenge any inaccuracies on your credit report, or to spend six months or a year working on your credit rating before you apply for a loan. This can be tedious, but even a few minor errors on a credit report can impact how a potential lender views your potential. You should avoid anyone promising to work miracles with your credit rating in a short time – especially if they want to charge you. There’s nothing they can do that you can’t do yourself for free. But one nice thing about bad credit history is that there are limits to how far back lenders look. Even a few small moves forward can make a big difference when it’s time to actually apply for a loan.
Finally, you can consider a less-expensive vehicle. Maybe the car or truck you really want is new or relatively new. But the dealer has an older option with similar features and a decent used vehicle warranty. It may be easier to borrow a much lower amount. And timely repayment improves your credit history just as reliably as paying twice as much would do. It’s not always easy to compromise. But try to look at the big picture and the long game as well as the immediate situation.
Trade-Ins, Down Payments, and New vs. Used
Trade-ins are a crapshoot with car dealers. It’s difficult to know how much they’re really giving you, but you can at least go into the process with a blue book value for your existing car and do a little research about the most likely vehicles you’d like to buy and what they’re selling for in your area. It can be tedious, but it can also save you literally thousands of dollars over the life of the loan – and that ain’t nothing.
Down payments are a bit more straightforward. If you can reasonably afford to pay even a few thousand dollars down on your new purchase, it can shave a substantial amount off of your monthly payments. It might also allow you to shorten the life of the loan, which saves you even more on interest over the life of the loan. What might seem like a small chunk each month adds up quickly in three or four years.
Finally, buying a new car vs. purchasing used is a major decision. New vehicles are, of course, new – which certainly has appeal. The smell alone may feel worth the extra money and extended life of the loan! Then again, you can buy “new car smell” in a spray and shave off up to half the cost of the vehicle… so there’s that. Generally, you’ll find financing a new vehicle to be a bit easier. The car or truck itself acts as natural collateral for the loan. And dealers are generally anxious to move new cars and trucks off the lot more than they are their inventory of used vehicles. Used cars, of course, cost considerably less to begin with. Some dealers offer pretty solid warranties on their previously owned inventory. And insurance will be much less than it will for a new vehicle.
It’s all up to you, but these are decisions that are much easier to think about before you’re standing on the lot, staring down the row of shiny new toys. But I digress – we were talking about where to look for the best loans…
Dealer financing is in many ways similar to what you’ll find at your local bank or credit union or with most online auto loans. But it can present a few wrinkles which may be to your advantage or may not. One of the biggest factors is that if you’re sitting at the dealership talking about financing, you’ve probably already selected a car or truck you’d really like to drive home. Needless to say, that can change the dynamics of the financing discussion considerably. We want you to have the vehicle of your choice, but that shouldn’t lead you to skim through details that might end up costing you more than you realize over the life of the loan.
Most major dealerships have their own financing departments. This can be advantageous to you. Because it’s not unheard of for dealers in need of moving product off the lot to cut some great deals on price. Knowing they’ll make up some of the difference through their financing. You’ll also no doubt hear of special financing offers throughout the year – no money down, zero percent interest, etc. These also tend to come when dealers are in need of moving vehicles. Finally, dealership financing is available whenever the dealership is open – nights, weekends, whatever. When you’re ready to buy, they’re ready to finance you. (Then again, that’s true of online auto loans as well – but still…)
On the flip side, dealerships know that in the 21st century, they can’t make the sorts of margins they used to on each car or truck they sell. The internet and the proliferation of information available to consumers means they have to become increasingly creative about where they can squeeze out profits. If you’ve bought a new car in the past, you know how quickly the “oh-by-the-ways” add up after you think the price is settled.
“Oh, by the way – there’s a fee for driving the car off the lot. Standard stuff, don’t worry about it.”
“Oh, by the way – you’ll want the extended warranty on parts and transmission. Pretty typical, I’ll just add that on.”
“Oh, by the way – you should get this extra thing here everyone does. It’s on line 72 there. Can you initial next to that?”
“Oh, by the way – local taxes and fees. And tag and wheel-cleaning surcharge. And the cost of all these spotlights and balloons… just sign right there at the bottom…”
it’s not unheard of for dealers to slip in extra fees or charges to the financing paperwork. They know you’re anxious to wrap it up at that point. And unlikely to argue over a few hundred dollars here or a few monthly add-ons there. And maybe you won’t. But don’t let your desire to get on the road persuade you to smile and nod and sign on the dotted line. You haven’t committed yet, and if you don’t like what they’re offering, you can still walk away.
Honestly, more of us should sometimes.
Finally, don’t get fixated on the monthly payment being offered. It matters, absolutely – it’s very important that you be able to confidently make that payment every month on time. But look at the cost over the life of the loan as well. Manageable payments for an extended number of months still add up to a major investment. Don’t sign until all of the numbers make sense to you and your questions are answered.
It may seem a bit overwhelming, considering everything at once, but you’re going to do fine. The key is to keep your information organized and not let yourself be rushed into anything you’re not comfortable doing. Sit down with several lenders and explore online auto loans as quickly or as methodically as you choose. Don’t let dealers persuade you that you have to leave with a car or truck the first time you visit. Or the second, or the third. Buy when you’re ready to buy.
We can’t tell you which vehicle is best for you. And we’re not going to tell you what offers to accept. Or whether to accept any of them at all. Our expertise is connecting buyers with online auto lenders who then compete to offer you online auto loans. This flips the traditional dynamic associated with getting an auto loan or any other kind of financing. There’s no reason you should go from lender to lender begging for credit. You’re the customer, whatever your credit rating or credit past. They should be working for your business, not the other way around.
We’d like to think it doesn’t stop with a car loan or any other single transaction. At OfferEdge, we’d like to become part of your overall financial health and progress. Whether it’s loans, investments, taxes, budgeting, or anything else related to making your money work for you instead of you always working for your money, let us show you what we can do. Maybe it’s a little idealistic, but we believe things can be better than this.
In the meantime, let’s see what we can do about hooking you up with those lenders. Just between you and me, I’d pass on the upholstery protection package.
Blaine Koehn is a former small business manager, long-time educator, and seasoned consultant. He’s worked in both the public and private sectors while riding the ups-and-downs of self-employment and independent contracting for nearly two decades. His self-published resources have been utilized by thousands of educators as he’s shared his experiences and ideas in workshops across the Midwest. Blaine writes about money management and decision-making for those new to the world of finance or anyone simply sorting through their fiscal options in complicated times.