A car loan is a way for you to finance the purchase of a vehicle. The money you borrow is applied toward the purchase price of the car, including the down payment, and it is paid back over time.
There are several ways you can obtain financing for your new car, such as direct lending and dealer financing. Be sure to shop around to find the best terms for you.
In-house financing
When you apply for a car loan at a dealership, the dealer can offer in-house financing that doesn’t involve banks or credit unions. This type of auto loan is commonly referred to as “buy here, pay here.”
The benefits of this type of financing are that it’s easier and faster to get approved for a car loan, regardless of your credit score. In addition, you can usually take advantage of extended warranties or flexible interest rates.
However, you should be aware that in-house financing can also come with higher interest rates than other options. Additionally, these loans can include strict terms and penalties for late payments.
In-house financing may be a good option for some people, but it’s important to shop around before making a final decision. This way, you can find the best loan for your needs and avoid unnecessary fees. You can do this by comparing interest rates from banks and dealers. It can save you money in the long run and lower your chances of repossession.
Direct lending
Direct lending options can provide a more streamlined car buying and financing experience. When you choose to work directly with a bank, credit union or online lender, you can shop around and get the best rate for your particular financial situation.
Indirect financing is also available, but it requires a lot more trust between the dealer and you. You may also have to pay higher interest and payments because of the dealer’s role as a middleman.
The process of indirect financing differs from that of direct lending based on the identity of the lender and state law. For example, TILA disclosures, applicable state laws and rate caps, and required notices vary depending on whether the transaction is a loan or a retail installment sale.
While direct loans are often easier to obtain, indirect loans can provide a large volume of additional income and asset growth for your credit union. However, indirect loans must be monitored closely for high rates of pay-offs, charge-offs and inconsistencies in documentation.
Dealerships
A dealership offers a variety of ways to get car loans. These can include buy here, pay here financing and in-house financing with a finance company or third party.
Regardless of which type of financing you choose, it’s important to shop around for the best rate and terms available. This will help you to save money over the long run on your auto loan and avoid any dealer gamesmanship.
The main thing to look for is a low interest rate and the ability to get approved quickly. You should also consider any fees and your credit history.
Dealerships make their money from many areas beyond car loans, including trade-ins and warranty sales. This is why they may offer a loan for your new vehicle that’s lower than what you can find elsewhere. They do this to maximize their profit.
Shopping around
If you want to get the best rate on your car loan, you need to shop around. You can do this by working with banks, credit unions or online lenders.
Banks offer pre-approvals, which means that they have agreed to lend you a certain amount of money at a specific interest rate. This is usually a good starting point for comparison-shopping because it shows lenders that you’re serious about getting a car.
Your credit score, however, will determine what rates you can get based on your income and assets. To get the lowest possible interest rate, you’ll need to work on improving your credit scores.
The best way to do this is by paying your bills on time. This will keep your credit score high and reduce the number of inquiries that your lender will run. It’s also a good idea to take advantage of all the other tools that you can use to improve your credit, such as obtaining a free credit report from the three major credit reporting agencies.