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What is a Car Loan?
When looking for the car of your dreams, it is often difficult to oversee all financial requirements attached to this purchase. If your credit rating is good, you should not have troubles getting a personal loan for this and in fact, it is often the cheapest option for financing a car. The interest, fees and other costs included in your loan are expressed by the annual percentage rate (APR), which tells you the sum you will need to pay each year for the privilege of having a car loan.
Like with other loans, you take out a sum and then repay it in monthly installments, which you have agreed upon in the contract, including the interest rate claimed by the lender. Average car loans run for about five years, and like with other loans it is worthwhile to look out for the lowest interest rates.
How does a Car Loan work?
Whether you choose to apply for your loan with a car dealer, bank, credit card union or an online company, lenders will look at your credit card report to make sure that you can keep up with your monthly repayments.
Interest rates that you receive can vary with the rates that are being advertised, as your credit card rating will play a decisive role in the determination of the interest rate. If you are considered high-risk, it may happen that your rate will be increased.
Some lenders may require or allow you to put some money upfront on your vehicle. This can show the lender that you are able to afford the vehicle, and also decrease the amount of your monthly payments.
Using a loan for the purpose of buying a car, this automatically means that your new car is collateral to the loan and can be repossessed if you fail to repay the loan. This also means, that a car can only be resold once the loan has been fully repaid.
Used cars usually have higher rates than new cars. However, some credit card unions or banks will not make a distinction. Your geographic location may equally affect the amount of interest you pay in some areas.
What do you need to qualify for a Car Loan?
In order to qualify for a Car Loan, you usually need to provide a proof of income, showing that you have a steady financial background in order to cover your installments.
Some lenders may verify with your employers to reduce their risk. While the vehicle itself is often collateral to the loan, it is good to have other assets as alternative collaterals, in case of the vehicle being stolen or getting damaged. As for all other loans, lenders require a proof of identity and a proof of residence and need the dealer’s current invoice for the vehicle, proof of registration ownership and the proof of an insurance coverage. Some loans, which are geared toward environmentally friendly vehicles may also require a proof of emissions.
Top Tips when choosing a Car Loan
Many vehicle-buyers look for financing with their car dealers, as it is fast, convenient and allows customers to take care of everything in one place, while dealers often may offer additional warranties or other products if you get your Car Loan with them. It can also make it easier to transfer documents, such as the dealer’s invoice and a proof of insurance.
However banks and credit unions equally offer competitive Car Loans to customers. This has the benefit of keeping all your banking activity in once place and you do not fall prey to sales pitches.
They can explain financial conditions well in advance and even in some cases tell you when you are paying too much for a car, which has the benefit that buyers can keep the decision where to buy their vehicle and which one they buy separate from any financial considerations. In addition, they may be less likely to fall prey to sales offers of the car dealers. Other things to bear in mind include:
- Banks and credit unions sometimes offer free or cheap life insurances and disability insurances with your loan. Take this into account if it is of importance to you.
- Another option for taking Car Loan are online providers. They tend to offer competitive rates and work the same way as bank loans, however, you do not have the benefits of personal service and all your transactions will be handled online.
- As with other loans, always shop around for the best deals and lowest interest rates. Specifically if you choose to get your loan with a car dealer, do not allow yourself getting distracted by special offers or add-ons. If you are easily influenced by such things, stick to getting your loan from banks or credit unions.
- Watch out for loans that are front-loaded, which means they allow you to repay larger sums in the first few years, but then smaller sums for the rest. This is specifically important if you are planning to repay the loan as quickly as possible.
- Choose in advance whether you want a longer or shorter length of your loan, taking into account that this will affect the interest rate and amount of monthly repayments you are expected to make.
- Make sure you get your car loan from a recognized loan provider, as featured in our loan table, please read our article on Loan Scams, and read users comments if you need convincing.