What Is an Auto Loan?

Except if you’re able to pay for your new car with cash upfront, you’re going to need some sort of an auto loan. But what exactly is auto financing? In summary, it’s the type of loan you take in order to be able to afford a new vehicle. Within this article, we will break down everything you need to know about them before you make a decision about whether you need one or not. 

Often people want to buy a new car but have trouble paying it in full at once, and that’s when knowing about these loans is important. 

An auto loan is a type used for financing a purchase of a new vehicle. These loans are offered by multiple lenders including banks, credit unions, and online lenders. They have collateral, and it is the car you’re trying to buy. If you cannot repay the loan, the lender will take the vehicle.

How Do Auto Loans Work?

When talking about car loans, having collateral makes them secure. Despite this, they are still considered high-risk loans by lenders and typically have high interest rates. The term of an auto loan varies depending on the lender you choose and the vehicle you are trying to get. This period is usually between 36 and 60 months. You’ll make monthly payments during this period until your loan is completely paid off. 

Car financing can be tricky, so be sure to research different lenders and compare different offers. Pay attention to terms and conditions and interest rates to budget them in your monthly expenses. Be careful because if you cannot pay all of it back, the lender will take your car. 

Direct vs. Indirect Auto Loans: What’s the Difference?

If you’re currently in a process of getting a new car, you may be wondering whether to get direct or indirect vehicle financing. Both have their benefits and drawbacks, so it’s essential to know the differences before deciding. 

If you choose a direct auto loan, the money you are borrowing comes directly from a financial institution such as a bank or credit union. It’s important to mention that the institution you choose holds the title to the car until you pay off your loan. The main advantage of these bank auto loans is that they usually have lower interest rates but buckle up because they need a lot more time to get approved. A longer waiting time is partially due to checking credit history and income levels just to be sure you are able to afford it. 

An indirect loan is a type you get from an actual dealership you plan to purchase your car from. It is also known as dealer financing. This type of vehicle loan can offer you more flexibility with the payment schedule, but they usually have higher interest rates. Plus side is that this type of auto loan application is quite easy. Additionally, if you have bad credit, an indirect loan will be easier to get than a direct loan. Like a direct loan, you’ll not hold a title to your car until your loan is paid off. 

New Auto Loans vs. Used Auto Loans: Which Option Is Best?

Many factors should be considered when taking out an auto loan, but firstly you should ask yourself what type of vehicle you want to purchase. New or used? 

Both have their own pros and cons, so be sure to weigh them out, so you’re making the best decision.  

New Auto Loans – Pros 

• Lower interest rates – Choosing a new vehicle typically means getting lower interest rates, so you’ll be saving money in the long run. 

• Shorter loan terms – So, your new auto will be paid sooner, and you can enjoy it debt-free. 

• Fewer maintenance issues – The bottom line is that you are getting a car that has not been driven before, so there are no major maintenance issues that could add up to the price. 

New Auto Loans – Cons 

• Higher monthly payments – New cars are generally more expensive, so your payments will be higher than with choosing a used car. 

• They may not hold a good value over time – In a few years, the price of your new vehicle can go down quite a bit, so you may not get a good price once you want to sell it. 

Used Auto Loans – Pros 

• More affordable
• Usually hold better value over time 
• Lower monthly payment 

Used Auto Loans – Cons 

• Higher interest rate – Even though your monthly rate is lower because the car is more affordable, there is a more significant interest on these loans. Average car loan rates can be anywhere from 4% for new cars to about 8% for used ones.

• Different issues with the vehicle – If you skip an inspection by your trusted mechanic, you could end up paying for repairs and other issues you haven’t seen before the purchase.  

At last, the best option for you will depend on your personal preferences as well as your budget. A used car can be a way to go if you’re looking for a more budget-friendly option, but if you want that shine and glory of a new vehicle- new car loans would be more suitable for you. 

How Does an Auto Loan Affect My Car Insurance?

Taking out an automotive loan will affect your car insurance in several ways.

Firstly, having a loan on your vehicle means that the lender will require you to carry full coverage insurance. This means if any damage is done to your car, caused by an accident or other event, you will be responsible for paying. Secondly, your monthly insurance payments will be higher because lenders consider you a high-risk driver. Being categorized as “high-risk” means that if you default your loan, you will lose the car, but the lender will potentially get a vehicle that is worth less now or even need to pay for damages caused by an accident. 

Are Auto Loans a Good Idea?

The answer depends on your circumstances. There are a few factors to consider before making any kind of decision: 

1. Will you be able to afford it? When buying a car, don’t just think about monthly payments and interest rates, be sure you’ll also think about fuel and maintenance. 

2. Can you put in a good amount of down payment? The bigger your initial payment is, the smaller the rest of them will be. 

3. What is an interest rate like? If you decide to get this type of loan, ensure to shop around to get a good deal. 

4. Are there any penalties? Many lenders will charge you if you decide to pay off your loan early, so be sure to ask about this too. 

With all this being said, it all comes down to you. If you want a new car, have a good credit score, and can afford the monthly payments and the fuel, then a vehicle loan can be a great way to finance a new car. However, if you have bad finances or are not sure if you will be able to afford it in the future, maybe this isn’t the best idea. 

Final Thoughts

Even though vehicle loans have a shorter term and sometimes tempting rates, you should still be careful. Like with any other type, this one has many pros and cons, so be sure to do your research before applying. Make sure you shop around and compare offers from different lenders. Also, don’t forget to read the fine print and understand the terms and conditions of your loan, before signing any paperwork. 

The vehicles usually lose some value over time, so if you are tight on finances or think this is a good investment, it might not be. We recommend you talk to your financial advisor and get his help making such a decision.