Did you used to keep Hot Wheels in your pocket when you were a kid or have Malibu Barbie’s convertible?
Prices have come up a lot since then, especially on the full-sized toys, which means you may need an auto loan. So if you’re in the market for the grown-up model, there are ways to finance your vehicle that won’t poke in hole in that pocket.
Common Features of Auto Loans
- Car loans are secured loans that use the car as collateral against the loan. If you default, the lender can repossess the car and sell it to make itself whole.
- With a secured car loan, the lender technically owns the car while the loan is in place. You will not get title to the car until you have made the last payment.
- Most car loans are installment loans that are paid back in fixed monthly installments—usually over 3, 4, or 5 years (though some lenders will provide longer terms, such as up to 8 years).
- While a longer-term loan may sound appealing (to lower your monthly payments), you will end up paying more in total interest over the life of the loan for a depreciating asset. In our view, if you can’t afford the monthly payments on a loan of up to 5 years (and we prefer 4 years), you should consider buying a less expensive car (or leasing a car or buying a used car).
- Given the high cost of new cars, we think it makes sense to consider a reliable, dealer-certified used car that has been independently inspected by a mechanic of your own choosing (or maybe even two). The common adage is the first $1,000 of value evaporates the moment you drive a car off the lot.
- Because this is a secured loan, the lender is taking on less risk, which usually means the interest rate will be lower than on an unsecured personal loan used to buy a car.
- A car loan is also somewhat easier to qualify for than an unsecured loan.
- Look for a loan with no prepayment penalty (a fee or penalty for paying off the loan early).
- Even if you are allowed to make extra payments, contact customer service to inquire about the process for making principal-only payments so that these payments will be properly credited to your account.
What About Dealer Financing?
- Some car dealerships will offer 0% interest or reduced interest rates on financing at different times of the year (“dealer incentives” to move inventory), but only to buyers with excellent credit.
- It’s a good idea to check your credit score before you go to the car dealership so that there will be no major surprises about your eligibility.
- You should compare the rate and terms you’d get through dealer financing with those that you could get through a bank or online lender.
- You may want to get pre-qualified for a loan through a bank or online lender before you go to the dealership (or at least see what rates they are offering) so that you will know which one offers you the best deal (in rate, fees, and terms).