There is a lot to understand about how car financing works, even if you have had a car loan before. Car dealerships may offer financing onsite, but auto financing from a credit union may offer you better interest rates and payment terms that will save you money for the life of the loan.
Most people will need an auto loan in order to drive their new or used vehicle home from the auto dealer. There are several different financing options you can choose from, including applying at a local bank or credit union. In some cases, it can be easier to get approved at your credit union since you already have an established relationship with them. But if you don’t already have a relationship with your credit union, becoming a member is fast and easy, and you can do it at the same time you get your loan.
How Do Car Loans Work?
Car loans are personal loans using the collateral of the vehicle itself to secure the loan. You use this lump sum to purchase the car from the dealer, or a private party, and then repay the amount with interest over time. Until you have paid the loan in full, the lender holds a lien on the car title and the right to repossess the vehicle if you default on the loan.
You will complete a loan application to apply for auto financing, which will be used, along with your credit report, to determine your interest rate and how much money you can borrow for your car purchase. Car loans are broken down into the principal, or the lump sum needed to purchase the car, and the interest, which is the additional amount you pay on the borrowed amount. You will pay back the loan with monthly payments toward the principal and the interest.
You can also apply for a car loan from your bank or credit union to refinance an existing car loan, especially if your current payments are higher than you’d wish, or to buy out a car lease. While auto dealers and online lenders often offer no-down-payment and low introductory interest rates, the terms and conditions may not be easy to understand and can sometimes result in you paying much more than you expect.
Factors That Change How Much You Pay
Many factors affect your monthly payment and the total price you pay for the vehicle by the time you repay the loan. Some of these include:
- Longer term loans, sometimes as long as five to six years, can reduce your monthly payment but drastically increase the amount of interest and total cost of the vehicle. Long-term car loans can leave the buyer “under water” when the vehicle depreciates faster than the loan is paid off.
- Interest rates that are variable or increase over time. Low introductory rates can rise drastically, and being late on a single payment might cause you to lose the low interest rate and wind up paying much more than you expect.
- Additional fees and charges, such as loan initiation fees, auto payment fees, late fees, and other fine print items, can increase total payments while maintaining an illusion of lower interest rates.
Will My Car Loan Be Approved?
There are several things lenders will review to determine whether they can approve your auto loan application, including:
- Your debt-to-income ratio. Financial institutions want to make sure you have enough disposable income left over every month to be able to afford a car payment.
- Your credit history and score. Having a good credit score plays a factor in approval. Even if your score is a little low, it does not mean your loan will be denied, but you may be quoted a higher interest rate.
- The amount you want to finance. Lenders want to know exactly how much you need to borrow to purchase your vehicle and that you have the ability to repay the loan.
- The amount of your down-payment/trade-in allowance. Lenders want to see you make an investment in the vehicle. The more you can put down, the less you need to borrow, which translates to lower monthly payments.
- The condition of the vehicle you want to purchase. Lenders want to make sure the vehicle you are purchasing will retain a value that matches the amount borrowed.
- The requested repayment period. Normally, most car loans range from three to six years, based on the amount financed and the number of monthly payments.
Are There Any Benefits of Getting Preapproved for an Auto Loan?
It can be beneficial to get pre-approved for an auto loan, prior to shopping for vehicles. You will need to know the vehicle class, such as car, crossover, SUV, etc., and whether you want a new or used vehicle. With used vehicles, you will want to provide the model year you are considering.
One of the reasons it is a good idea to seek pre-approval when financing a car is knowing ahead of time the price range of vehicles you can afford. Another benefit of pre-approval is you are in a much better position to negotiate with the car dealer over the sales price.
Once Your Loan Is Approved
When your car loan is approved, the funds can be transferred to the car dealership or private party, and you can take possession of the vehicle.
You will be required to carry full auto insurance on the vehicle so that the lender will receive compensation if the car or truck is totaled. Insurance companies charge higher rates for some models, so you may want to get an estimate on a car before you complete the purchase.
You will receive a payment book and/or access to a secure online payment portal to make your monthly car payments. Some lenders will offer discounts or credits for setting up autopay on the loan.
Your Credit Union Offers Flexible Auto Financing
At The People’s Federal Credit Union, you can get pre-approved. Many members wait for our One Rate Loan promotion, which happens every April through June. One Rate means you get the same rate whether you buy a car, boat, RV, or motorcycle. One Rate remains the same, regardless of the loan repayment period.
Our loan rates change periodically, but are usually some of the best you’ll be able to find, and you do not need perfect credit to qualify. TPFCU strives to work with members on establishing good credit with financial products designed for the needs of our members. You could even qualify for up to 100% financing, which is currently available on our collateral loans.
For more information about One Rate and pre-approval, or to apply if you have already found the car you want to buy, please feel free to stop by your nearest The People’s Federal Credit Union branch in Amarillo, Canyon, or Childress, or contact us at 806-359-8571 today!
