Online Auto Loans
Auto Loan Guide Step 9: Traditional and Online Auto Loans Fact Sheet
By: Meghan Carter
Shopping for online auto loans, or any type of auto loan for that matter, can be confusing. To help you get the best deal when looking for online auto loans, we've put together a short fact sheet. Our auto loan fact sheet tells you the minimum of what you need to know when looking bank, credit union, dealership or online auto loans. Each part of our auto loan fact sheet is explained in detail in our Auto Loan Guide. The Basics of Traditional and Online Auto Loans
- Before getting an auto loan, it is important to decide whether it is really worth buying an expensive car over a more economical version. That's because cars are bad investments. They lose value over time. You will not be able to make back the money you spent on your car when you go to sell it.
- Most auto loans have term lengths between 24 and 72 months.
- Auto loan interest rates are normally fixed, which means the interest rate does not fluctuate during the life of the loan (Nerad 133).
- When comparing auto loan rates, you should look at the annual percentage rate (APR) instead of the interest rate because the APR tells you how much the auto loan will actually cost you. Both the auto loan's interest rate and fees are included in the APR. Auto loans with low APRs are cheaper than auto loans with high APRs (Morris 44).
How to Tell if You Can Afford the Auto Loan
- The lower your credit score, the more money your auto loan will cost you. That's because people with bad credit are charged a higher interest rate than people with good credit.
You should be able to afford the vehicle you are looking at if:
- You can put down between a 10% and 20% down payment on your auto loan. It is much better to put down a 20% down payment (Nerad 128).
- You can afford the monthly payments on an auto loan with a term length of 48 months or less (Howard 8).
If you can't make a 10% to 20% down payment or afford the monthly payments on a 48-month auto loan, then you run the risk of becoming "upside-down." Being "upside-down" means you owe more on your auto loan than your car is worth (Boyett 131). If you decide to trade-in your car when you are "upside-down," you will end up still owing money instead of making money. It will be hard to buy a new car because you will have to find enough money to pay off your old auto loan and afford the down payment on your new one.The Difference Between New and Used Auto Loans
- New auto loans have lower interest rates than used auto loans. However, the difference in the interest rate may not be enough to make it worth buying a new car over a used car. To tell, you have to compare your options to see if it is cheaper to buy new or used.
Where to Find Auto Loans
- If you are purchasing a very old used car, your lender may offer you a signature loan instead of a used car loan (Cox 40). Signature loans have higher interest rates than auto loans. Because the interest rate on signature loans can be so much higher, sometimes it is smarter to buy a newer car that you can get an auto loan for because it will cost less money. Compare the cost of the really old car to newer cars before making a decision.
Credit Unions on average have the lowest interest rates. Typically their interest rates on auto loans that are 1 1/2 percentage points below the interest rates banks offer on auto loans (Fisher 74). What to Do Before Walking on the Car Lot
Online Lenders are the next place to look. Online auto loans' interest rates are almost as low as the auto loan interest rates offered by credit unions. Online auto loans have interest rates are usually about a percentage point lower than traditional banks (Howard 2).
Banks interest rates are normally higher than credit unions and online lenders, but lower than car dealerships
Car Dealerships are normally the most expensive place to get auto loans because their interest rates on auto loans are typically one to two percent higher that the interest rates offered by banks (Fisher 73). Sometimes car dealerships offer special deals and incentives, but beware. They are not always your best option. Always compare your options before choosing a zero-perfect financing deal or any other promotional deal offered by car dealerships. If you think the dealership has the best deal, ask to take the contract home and read over it carefully to make sure there aren't any hidden fees (Whitaker 102).
- Shop around for auto loans before looking at cars. Look at online auto loans. Call local credit unions and banks. See which lenders have the best APR.
How to Negotiate on the Car Lot
- Be preapproved for an auto loan because it will enable you to negotiate better with the car dealer. Being preapproved lets the dealer know you are serious about buying a car and the dealer can't try to talk you into buying a more expensive car than you can afford (Fisher 74).
Prepaying Traditional or Online Auto Loans
- Know the Invoice and MSRP price.
- Research Dealer Rebates
- Start low when telling the dealer what you are willing to pay.
- Don't let your dealer charge you for ADP, which stands for additional dealer profit ("Buying A New Car").
- Know how the price you negotiate will affect your options if you plan on financing through the dealer.
You should prepay your auto loan because it will save you money by decreasing the amount of interest you must pay.
In order to save as much money as possible by prepaying your auto loan don't get a loan that:
- Has prepayment penalties.
- Uses the Rule of 78 to calculate your interest.
To save the most money through prepayment get a simple interest auto loan. The Rest of Our Auto Loan Guide:
Boyett, Joseph, H., and Boyett, Jimmie T. The Guru Guide to Money Management. Hoboken: John Wiley & Sons, Inc., 2003.
"Buying A New Car." Federal Trade Commission For the Consumer. April
2006. Federal Trade Commision.
http://www.ftc.gov/bcp/conline/pubs/autos/newcar.htm. 6 August 2006.
Cox, Roy, and Gigliotti, Davidson. The 300,000 Mile Car. Albany: Delmar Thomson Learning, 2001.
Fisher, Sarah Young, and Shelly, Susan. The Complete Idiot's Guide to
Personal Finance in Your 20s and 30s. Indianapolis: Alpha Books, 2002.
Guttentag, Jack. The Mortgage Encylopedia. Madison, Wisconsin: CWL Publishing, 2004.
Howard, Clark, and Meltzer, Mark. Get Clark Smart: the Ultimate Guide
to Getting Rich From America's Money-Saving Expert. New York: Hyperion,
Morris, Kenneth M., and Morris, Virginia B. The Wall Street Journal
Guide to Understanding Personal Finance, Fourth Edition. New York:
Lightbulb Press, Inc., 2004.
Nerad, Jack. The Complete Idiot's Guide to Buying Or Leasing a Car. Indianapolis: Alpha Books, 1996.
Whitaker, Leslie, and Austin, Elizabeth. The Good Girl's Guide to
Negotiating. United States of America: Little, Brown and Company: 2001.