Car Loan Process
A car loan begins like any other loan, by applying to a bank or other lender. However, just like when getting a mortgage, it’s a good idea to check your credit score and get pre-approved before contacting a dealer. Knowing where you stand up front will give you an edge in negotiations and let you know how much car you can actually afford before the process begins. When you apply for a car loan or go through the pre-approval process, you will receive an approval or a denial with reasons. Once approved, the lender will suggest other requirements such as interest rate, loan term, monthly payment amount, and down payment. If you’ve decided to take out a loan from a dealer and have already selected a car, the process is pretty much complete: just sign the paperwork, make a down payment, and drive away with your new car. After completing the pre-approval process, you still need to choose a car and negotiate a price with the dealer. However, making sure your loan is approved and available on time can save you a lot of time in the financial back office.
Important Auto Loan Terms
APR: APR refers to the annual percentage rate on your auto loan. Unlike the posted interest rate you see advertised at your local dealer, the APR includes fees and other charges.
Down Payment: A down payment is the amount you can pay in advance to reduce the amount you owe on your car loan. The bigger your down payment, the less you’ll need to take out a loan and the lower your monthly payments will be. A larger down payment also means you’ll end up paying less interest over the life of your loan, since you’ll be borrowing less money to begin with.
Trade-in: When you buy a new car, your dealer will give you the option to trade in your old car to cover a portion of the purchase cost. If your old car is worth $10,000 and your new car is worth $20,000, a trade-in will reduce the value of your new car to $10,000. You can see the value of your trade-in in much the same way as cash for a down payment.
Loan Term: Loan Term is the period of time given by a bank to repay a loan, usually expressed in months rather than years.
Monthly Payment Amount: Monthly Payment Amount is the amount sent to your bank each month to cover your loan payments. Part of your payment is applied to the loan amount and part of your payment is applied to loan interest.
Principal: The principal is the amount you actually borrow to buy the car, excluding interest. If your car costs $15,500, you’ll pay that amount, or principal, plus interest, fees, taxes, and other charges.
Total Cost: Total Cost is the total amount you end up paying for the car, including taxes, interest, fees, and other costs that accrue over time.
Where can I get a car loan?
Online Lenders: Applying for and receiving a loan online has never been easier. Organizations like MyAutoLoan and LightStream offer online loans that can be approved and funded within 24 hours, making it easy to buy a car without a trip to the bank.
Bank: Bank is a popular option for car financing, offering a variety of loan products to all types of customers. Many small local banks offer special loans or offer special interest rates to attract customers, making them an attractive option for many people.
Credit Unions: Credit Unions are non-profit organizations and in many ways are more customer/member oriented than banks. Choosing a credit union typically offers better customer service, financial education programs, and sometimes lower interest rates.
Dealer Financing: Many dealers, especially franchised new car dealers, offer internal financing. In most cases, they work with banks to provide financing, even if it appears to be from a dealer. A good example of this is Chrysler Financing, operated by Banco Santander.
Auto Loans from Online Lenders
LightStream
Lightstream is SunTrust Bank’s online division, offering fast financing decisions and financing in as little as 24 hours after approval. This site may offer great terms and services, but its loan offers are best suited to those with good credit. Banks issue funds and encourage customers to pay for new cars as if they were cash, making buying and choosing a car much easier.
Advantages and Disadvantages
- Quick decisions and loan funding
- Enables cash purchasing for a car
- All-online operation makes it easy to apply and get approved
- Excellent choice if you have good credit
- Best rates are reserved for top-tier credit customers
- Minimum credit score eliminates all but the “best” borrowers
- No pre-approval – application requires a hard credit check
MyAutoLoans
MyAutoLoans is a marketplace that routes a borrower’s application to multiple lenders at the same time to find the best interest rate and the one most likely to be approved. The site offers services such as loans, refinances, lease terms, and can issue approvals in just 30 seconds. The borrower will see multiple loan offers in his one application, making browsing quick and easy. However, you can’t buy a cheap car with MyAutoLoans as the company’s loans are capped at a minimum of $8,000.
Additionally, customers in Alaska and Hawaii are out of luck because the company does not offer loan products in those states.
Advantages and Disadvantages
- Fast approvals
- Ability to compare offers from up to four banks at once
- Discounts available
- Offers loans for people with a variety of credit backgrounds
- May be overwhelming to receive so much information at once
- Not open to borrowers in all states
- Customer support not as strong as others
Auto Loans from Banks
Capital One
Capital One has become one of the most well-known and popular auto loan providers in the country. The company’s Auto Navigator tool provides a user-friendly app and interface that makes it easy to understand the process of getting loan funds and new cars. Capital One works directly with a network of sellers, so your options for where to shop are limited. The good news is that your bank’s app will show you cars that meet your pre-approval and payment requirements, so you can find the model that’s right for you. The quality of Capital One’s technology is part of what drives its convenience and ease of use. The app is simple and allows you to register your child’s play. Once the process is complete, your credit decision and pre-approval information will be clearly displayed.
Advantages and Disadvantages
- Excellent app and interface
- Easy-to-understand payments and loan parameters
- Huge network of approved dealerships
- You can only shop with the bank’s dealers
- Pre-approval only applies to select dealers, making it difficult to negotiate
- Not an option for buyers in every state
Santander
Santander Car Loans is a division of Spain’s leading bank Santander.
Although Santander does not offer refinances, acquisitions or loans to cover private car purchases, Santander does Chrysler’s “dirty work” as an in-house financing arm. If you’re purchasing a new Chrysler, Dodge, Jeep, Ram, or other similar vehicle, there’s a good chance your loan will be processed through Santander. Despite its size and age, the bank has a poor track record with customers, with customers often complaining about slow or unhelpful service staff.
Advantages and Disadvantages
- Offers loans to borrowers with less than perfect credit
- Simple application
- Can be used with Vroom or through Chrysler
- Spotty customer reviews
- Some view lending practices as deceptive
- Interest rates higher than the competition
Wells Fargo
Wells Fargo is one of the oldest and most established banks in the United States, but its recent history has tarnished its reputation with customers and regulators. Wells Fargo is still a huge financial institution with locations in all 50 states, so you can bank with Wells Fargo no matter where you live.
That’s good news. The bad news is that Wells Fargo doesn’t lend directly to consumers, instead requiring borrowers to work with one of the company’s 11,000 network dealers to complete the transaction. Once registered, you will be able to view and operate your account through the bank’s mobile app. This means you are not tied to a retailer for service and maintenance over the life of your loan.
Advantages and Disadvantages
- Wells Fargo offers competitive rates
- Buyers with poor credit can obtain loans
- Fewer fees and no prepayment penalties
- Does not lend directly to consumers
- Does not offer refinancing or buyout options
- Wells Fargo ranks poorly for customer satisfaction
Bank of America
Bank of America was the country’s largest bank for a long time, but it was dethroned by JPMorgan Chase. However, B of A is large enough to offer competitive interest rates and has a larger catalog of loan products than many other banks that its competitors cannot offer. Borrowers do not have to pay fees to repay their loans early, and banks can offer interest rate discounts if the borrower meets certain criteria. The downside is that A of B’s discount program heavily favors customers with large account balances, and the bank’s minimum loan amount is higher than others.
Advantages and Disadvantages
- Discounts available for some Bank of America customers
- Several loan options available
- No ability to prequalify
- Discounts only available to major B of A customers ($20,000 or more account balances)
- Eligible dealerships are all franchise stores
U.S. Bank
America The bank was founded in 1863 and is currently one of the largest banks in the United States.
The institution offers a variety of credit and financial products, including consumer banking services, mortgages, credit cards, personal loans, and more. Although many banks have relaxed credit policies to accommodate buyers from less-than-perfect economic backgrounds, the United States is one of the few that maintains strict credit requirements. The bank’s basic credit score requirement is 650 and a borrower must be over 18 years old to apply. America The bank did not disclose other requirements such as annual income. The major disadvantages of buying a car in the United States are: Banks charge early repayment fees if you repay your loan early. There are also late fees and other fees that some banks don’t charge.
Advantages and Disadvantages
- Consistent, easy-to-understand rates
- Discounts for some account holders
- Solid customer service
- Somewhat strict credit requirements
- Information not readily available on website
- Prepayment fee may apply for early payoff
Small Local Credit Union
When it comes to car loans, you can’t beat your local bank or credit union. Not only will you have someone to talk to when you walk in the door, but you’ll also save money in the process. Local financial institutions, especially credit unions, may offer special interest rates or special incentives for maintaining multiple accounts. However, choosing a smaller bank comes with unexpected challenges.
Your local credit union may not offer weekend or after-hours phone support like larger banks.
Additionally, the limited selection of loan products available may force you to look elsewhere.
Advantages and Disadvantages
- Personal service and in-person problem resolution
- Often offer better rates than national banks
- Some offer discounts or rate reductions for holding other accounts or enrolling in autopay
- May not offer the variety of products that a large bank canthis is the text of your list item
- Operating and customer service hours may be limited
- Options for phone or online account service may be limited
Reasons to Get an Auto Loan
New Car Loans
New cars get more expensive over time, which means only the most financially secure buyers can afford to make a down payment on a car. This is why car loans for new cars are so important. New car dealers may also offer financing incentives or very low interest rates to attract businesses. This can make your loan much more affordable in the long run.
Used Car Loans from a Dealership
Even if you can afford to buy a used car, it may be more advantageous to take out a loan. While cash in the bank can be useful for other things like investing, it also makes sense to keep cash in case of emergencies. You can also improve your credit score by taking out a small car loan for a used car and making on-time payments each month.
Used Car Loans for Private Party Sales
You may still have to jump through a few hoops to get your bank to write you a personal check, but you can use financing to pay for a private party sale. By paying , you can save yourself some hassle and stress. Payments involve people with large amounts of cash or people attempting to manipulate checks or wire transfers.
Refinancing an Existing Auto Loan
If you take out a car loan when you’re not in a good economic situation, you may be eligible for a higher interest rate than you’d like. You can refinance your car to get a lower interest rate and save money on the balance of your loan. This can be a very smart move for your long-term financial goals.
Requirements for Applying for a Car Loan
Applying for a car loan isn’t brain surgery and it’s not all that difficult, but there are a handful of things you’ll need to get your application completed smoothly. Various lenders have different requirements, but in general, required documentation may include:
- Driver’s license
- Income statement/pay stubs
- Co-signer, if required
- Proof of residence
- Proof of insurance
- Trade-in information, if you have one
Getting an Auto Loan with Bad Credit
The best way to ensure you get the best interest rate is to keep your credit score in top shape, but everyone makes mistakes and it’s easy to lose track of your credit score. The good news is that in some cases it’s very easy to get a loan. The bad news is that banks will charge more for this opportunity. The other bad news is that you’ll likely be required to make a larger down payment to get a lower loan amount. As with anything else, it’s best to look for bad credit car loans to find the best car loan for you. If you have bad credit, you may be tempted to go with the first lender you find, but keep an eye on as many options as possible. However, avoid applying to every bank, as tougher credit score inquiries can make your credit score even worse.