Auto Loans and Auto Financing Facts You Need to Know

Auto Loans & Auto Financing Information You Should Know

Banks are experiencing a rise in automotive lending as a result of the recent drop in mortgage loans owing to the poor economy. The auto sector saw its best sales in 15 years in 2015, with over 17 million vehicles and light-duty trucks sold.

The majority of Americans require a loan to purchase a car, and the majority of these loans are obtained via the auto dealership with whom they are dealing. There are alternative methods to get an auto loan, and doing some research BEFORE going out to buy a new automobile will help you a lot.

Before you buy a car, get loan approval.

You’ve discovered the automobile of your dreams, but you lack the funds to purchase it outright. Who does, after all? It is quite beneficial to shop for finance before visiting a car dealership. A car loan can be obtained from a variety of sources. You may go to your bank or credit union for financing, or you can take out a home equity loan through the dealership, which is normally offered by the automobile manufacturer. All of these financial institutions have different interest rates and credit requirements, so the more you look into your alternatives, the better bargain you’ll receive in the long run.

A car loan is similar to a house loan in that you must qualify based on your credit and income. The majority of banks and auto dealerships provide financing options for customers with less-than-perfect credit.

Your interest rate for “A” credit should be similar to the interest rates available for an “A” credit mortgage loan.

You should be able to secure a loan for two to three percentage points more than the “A” credit rates if you have acceptable credit.

Options for Auto Financing

Finance Companies – A “captive financing company” is a finance firm that is owned by an auto manufacturer, such as Ford Motor Credit or Toyota Motor Credit. In 2015, captive finance businesses accounted for around 28% of new-vehicle loans. Finance corporations purchase loans in bulk, mark them up and resell them at retail. It may be simpler to obtain credit from a financing firm than from a bank, but this generally comes at a greater cost in terms of interest.

Auto Dealer Finance – Obtaining financing from an auto dealer should be avoided at all costs. The car dealership, like mortgage lenders, usually offers a wide range of loan products to offer you. Naturally, they would strive to sign you up for the loan that will bring the dealership the most profit. The dealership receives a greater fee the higher the interest rate they charge you. Some loan providers have a restriction on how much extra interest percentage points an auto dealership may charge you, while others don’t. Before you go into a vehicle lot, it’s always a good idea to arrange your own finance. Treat finance as a distinct transaction from the other two, just as you did with your trade-in. Only talk about one issue at a time.

Banks – In 2015, banks accounted for around 35% of all vehicle loans. If you have a long-standing connection with a bank, you may be able to negotiate better conditions, such as a reduced interest rate. However, you do not need to have an existing account with a bank to obtain a loan from them, so shop around for the cheapest interest rate. Some banks provide a pre-approved loan, allowing you to shop with more freedom.

Credit UnionsTo get a loan from a credit union, you must be a member. They are responsible for around 18% of all used automobile loans. Credit unions have the best loan rates, with interest rates generally half to one percentage point cheaper than bank vehicle loans. Furthermore, credit unions usually charge simple interest, which saves you money.

Online – You may compare rates from all around the country at any time of day or night using the Internet. Several “e-loans” are only accessible online, and many sites include built-in calculators to assist you to figure out how much it will cost to finance your vehicle.

Home Equity Loans – Equity refers to the difference between what you paid for your home and its current worth. This equity can be used as collateral for a loan, such as one to buy an automobile. A home equity loan can be obtained through a bank or credit union. This is, in essence, a second mortgage on your house that is tax-deductible. This is an especially attractive offer if you already have a line of credit and don’t have to pay any additional origination costs. However, you should think twice about taking out this form of a loan. You are using your home as collateral to finance your automobile loan, and if you default on your auto payments, you might lose your home!

Penalties for early repayment of a loan

To ensure the best potential profitability, certain loans contain a prepayment penalty. Make sure you ask your loan officer whether the package he’s selling you includes a prepayment penalty.

The Rule of 78s is a concealed prepayment penalty.

A prepayment penalty may be inserted into a loan that does not appear to have one. The “Rule of 78s” is what it’s called. Let’s say you wish to pay off your loan sooner rather than later. You have your amortization schedule and use it to determine the payout. When you phone your bank to inform them you want to pay off your loan two years early, they give you a payback figure that is substantially higher than the one on your amortization plan. What’s going on?

When lenders apply the Rule of 78s, the entire financing charge is spread throughout all payments, although interest is charged more early in the loan period and less later, compared to other approaches. The Rule of 78s, also known as the “sum of digits technique,” takes its name from the fact that the total of the numbers 1 through 12, which correspond to the months in a one-year loan, equals 78.

For a 12-month loan, here’s how the Rule of 78s works: The first month, you pay 12/78 of the total finance fee, the   10/78, and so on. Long-term loans are subject to the same 78s regulation. For example, if a loan is for 24 months and the sum of the digits for months 1 through 24 is 300, the first month’s interest will be 24/300, the second month would be 23/300, and so on. A 36-month loan’s interest would be divided into 666 pieces.

Do you know if your loan follows the Rule of 78s? Examine your Truth in Lending statement. Ask the lender if it uses the Rule of 78s to calculate interest if you encounter a language like “you will not be entitled to any refund of a portion of the financing fee if you prepay.”

Loans with Lower Payments

Payment Shaver Loans are a form of loan offered by several credit unions in response to the increasing cost of lease payments. This loan combines the modest payments of a lease (up to 30 percent) with the equity-building payments of a traditional loan. Furthermore, there are no up-front costs and no end-of-lease disposal fees, which are commonly imposed at the end of a lease.

The borrower has four alternatives at the end of a Payment Shaver Loan:

  • The debt will be paid off if you return the automobile to the credit union.
  • Pay off the loan sum by selling the automobile.
  • Pay off the loan sum by trading in the automobile.
  • Keep the automobile and refinance or pay off the amount.

A Payment Shaver Loan also has the following features:

You will not be required to submit a down payment or a security deposit.

It provides a mileage allowance of up to 18,000 miles per year, with an eight-cent penalty for each excess mile driven.

Aside from extra miles, there’s not much to be concerned about towards the end of a Payment Shaver Loan. The automobile will be inspected for insurable physical damage, such as broken windows, grilles, or headlights, as well as missing or stolen goods. But that’s all there is to it. A nick in the door or a little stain on the seat will not be charged.

When it comes to financing a vehicle, there are a few things to keep in mind.

Asking questions is the single most critical thing you can do to guarantee you obtain the greatest finance package for your new automobile. There are several inquiries. For example:

  • What is the exact pricing of the vehicle that I am purchasing?
  • What is the entire amount of money that is being invested?
  • What is the financing fee amount?
  • How do you calculate the annual percentage rate (APR)?
  • What is each payment’s precise amount?
  • How many payments have you received in total?

You will receive a good interest rate and save money in the long run if you keep all of these helpful guidelines in mind and conduct some due research before heading out to the auto dealership. It’s easy to get caught up in the thrill of getting a new automobile, but keep in mind that you’ll be paying for it for the next 3 to 5 years, so seek the greatest loan offer you can.

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