All You Need to Know About Auto-Financing
Buying a vehicle, especially if it’s your first time, is a thrilling experience, but it can also be a little scary. Not knowing what to expect can make anyone a little unsure. If you want an experience with all the thrills and none of the chills, then learn what it means to finance a car and take the guesswork out of Chevy financing. Financing a car can be easy if you know what it all means, and we’ve put together an easy-to-follow guide to answer all your questions.
Now, we won’t go into a lot of detail about leasing because the intention here is to understand financing. However, it is important to recognize that there is a difference. Leasing a vehicle is basically like renting a vehicle. You make monthly payments until your lease is up, at which time you return the car. Some lease agreements allow you the option to buy the vehicle, while others do not.
Leasing is not for everybody. If you like the idea of getting the latest model vehicle and don’t care if you own the car, then leasing may be for you. On the other hand, if the idea of paying for a vehicle and not owning it sounds unappealing, then financing is the way to go. Additionally, leasing is not an option for everybody, and lease agreements come with clauses that dictate how many miles you can put on the vehicle, the condition it must be kept, etc., resulting in fines if these parameters are not met or are exceeded.
Financing, What Does It All Mean?
When purchasing a vehicle, you have two options, you can buy it outright with your own money, or you can finance it. Most people don’t have the ability to just buy a vehicle, which means financing is the best option to get a new or used vehicle that might cost more than you have in your piggy bank. Financing means obtaining a loan from a lender.
Auto Loan Terms
When discussing a vehicle loan, it’s a good idea to know what the terms mean so you know exactly what you’re signing. All loans are for a set term. The term is the amount of time it takes to pay off the loan. There are common time frames that most lenders offer.
Short-term loans are typically 36 months or 48 months. A loan that is intended to be paid off in 3-4 years will most likely have higher monthly payments, but you will also save money by avoiding additional interest. If you don’t know what interest is, don’t worry, we will cover that in a minute.
Now the most common loan term is called a standard term. A standard term loan is for 60 months. This is going to offer reasonable monthly payments and, depending on your credit rating, reasonable interest.
The last loan term is long-term. An average long-term vehicle loan is usually 72 months or 84 months. This is ideal for people who need lower monthly payments. However, this option will typically result in more interest paid, so it can cost more in the long run.
Down-Payments and Trade-Ins
One way to lower your monthly payments without extending the term of your loan is with a down payment. A down payment is a specified amount of money that is paid at the time of purchase. Typically, the buyer will decide what they can afford to put down as a down payment. However, in some situations, the down payment may be predetermined.
The ideal down payment is 20% of the vehicle price, but many people can’t afford that. 20% is said to be an ideal percentage because it offsets the initial depreciation that a new vehicle will experience. Obviously, that means the same does not apply for a used vehicle. Also, some people don’t do down-payments at all, and that’s ok too. While no down payment may mean higher interest rates or a longer loan term, sometimes it’s the only option. However, typically, the larger the down payment, the better. Larger down payments will lower monthly payments, save you money on interest, offset depreciation and increase your odds of getting a better loan.
There is another route that some people take, and that is using their old vehicle as a trade-in. A trade-in is when you take your existing vehicle and “sell” it to the dealership in exchange for a set amount off the price of the new or used vehicle you are purchasing. Knowing what the value of your vehicle is prior to using it as a trade-in is a great way to go in with more confidence. You may not get as much money for your vehicle using it as a trade-in versus selling it to a private party, but it will be a much more convenient route to go.
Interested in Understanding Interest?
Ok, so you understand the difference between leasing versus selling, what a typical auto loan term is, and what a down payment is, but what about the infamous interest rate? If you are new to the world of finances, then understanding an interest rate can be a little intimidating. So, what are interest rates?
Interest rates are a payment to the lender by the borrower. It is a prearranged percentage of the overall loan and acts like a service fee. There are several factors that impact how much interest you may get charged.
Your credit score is one of the most important factors when it comes to interest. If your credit score is too low, a lender will most likely tack on a much higher rate than if you have a great credit score. Checking your credit score through a reliable source is a great way to know where you stand and what to expect.
Another factor that impacts interest rates is the benchmark interest rate set by the Federal Reserve. The type of car you are looking to purchase, if it is new or used, and how long your loan term is for can all impact interest rates. While you can’t do much about the Federal Reserve’s decisions, making sure you maintain a strong credit score is your best chance at improving your interest rate.
One last thing to remember when considering a loan and its interest rate is if there is a prepayment penalty. In some cases, paying off your vehicle early may result in a penalty or fee. This is because by paying early, you avoid paying the interest for the remaining amount of the loan, which means the lender loses out on money. Not all loans have this stipulation, though, so make sure to find out prior to signing any agreement.
Who Offers Auto Loans?
You’ve learned all the ins and outs, and now you’re ready to get a loan, so where do you go? There are a few different avenues you can take on the road to purchase your next vehicle. The easiest and most obvious way to get a loan is to go through a dealership. Getting a loan through a dealership is easy and convenient. You can pick out a vehicle, get approved, and go home with your new or used vehicle, all in one day.
Choosing to finance through a dealership has other perks, like having the dealer do all the work. At Crossroads Chevrolet GMC, we have an entire finance team that does the nitty gritty for you, like searching for a lender, filling out the paperwork, and negotiating interest rates. Many people choose to go this route because it is the simplest way to get in and get out with little worry.
A dealership may not only reach out to outside lenders. Captive finance companies are another option for some dealerships. These are financial lending companies that are owned by auto manufacturers, such as GM Financial. Purchasing a Chevy, which is made by GM, can come with the added benefit of going through GM Financial.
Some dealerships also have the option to use what is called “Buy-here, pay-here” financing. This type of program is ideal for people who are still working on their credit. Typically utilized for used cars, these programs can cost more in the long run but may provide an option for someone that can’t get a traditional car loan.
Now, if going through a dealership isn’t the way for you, that’s ok; there are other ways. One such way is to go through a bank or a credit union. Going through one of these institutions has some benefits, especially if it is a bank or credit union that you currently use. One major benefit of visiting a bank or credit union prior to visiting the lot is that you can learn the terms of your loan and how much you can afford before picking out a vehicle. If you have less than stellar credit, knowing you are approved for a loan and what the terms are before you discuss purchasing may provide you with a little bit of security.
Lastly, with so much happening online now, it should come as no surprise that there are online lending companies as well. Like a bank, you can learn what you qualify for before you ever set foot on a lot. Just remember, when working with such important financial information, make sure you use a service from a reputable source. Taking advantage of an online option offered through a dealer is a convenient way to see what you qualify for without additional risk from unknown lenders.
The Whole Kit and Caboodle
A few final notes to make sure you know everything you need to before you drive off into the sunset; there are typically additional fees and taxes not included in the sticker price of the vehicle. If you only get approved for the value of the vehicle, you may have to come up with the extra costs on your own. If the loan-to-value is high enough, meaning the loan is for more than the value of the vehicle, then you can see about rolling the extra costs into the loan. These costs may be dealer costs, area-specific fees, taxes, etc. Additionally, there will be DMV fees that will also need to be paid, such as title fees and registration and car insurance.
Once you have taken steps to secure a loan and have decided on the vehicle that is right for you, all that is left is getting into your vehicle and enjoying everything your hard work has brought you. Buying a vehicle, whether it is new or used, is a major accomplishment. Be proud of what you have achieved, and if you have a little extra change to spare, why don’t you get yourself one of those fun license plate holders because you deserve it!
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