Buying a new or used car is a major financial commitment, which is why most people spend days, weeks, or even months researching their options before making a purchase decision. However, many people fail to take the time to research their auto loan options before buying a vehicle.
Don’t make this mistake. All auto loans–and lenders–are not created equal. So what is the best bank for an auto loan? What should you consider when comparing auto loans from different lenders? Here’s everything you need to know:
Banks vs. Dealerships vs. Online Lenders: Which is Best for An Auto Loan?
You can obtain an auto loan from various sources, including banks, car dealerships, and online lenders. Before you choose a lender, it’s important to learn about the pros and cons of each of these options.
The vast majority of banks offer auto loans to qualified borrowers. There are probably countless banks in your community, which makes it easy to obtain quotes and compare offers.
However, many banks will only approve borrowers who meet strict eligibility requirements. For example, some banks require borrowers to meet a minimum credit score requirement. Others may only offer a low interest rate to customers who already have an account or relationship with the bank.
Banks may also have restrictions on which vehicles you are allowed to purchase if you are approved for an auto loan. For example, a bank may not allow you to borrow money to purchase a used vehicle.
If you get an auto loan from a car dealership, you can purchase your new car and obtain financing from the same source. This makes getting an auto loan from a car dealership more convenient than some other lending options.
However, most car dealerships act as intermediaries in the financing process, which means they work with other lenders to help you obtain an auto loan. To compensate the dealership, the lender may include an additional fee or charge you a higher interest rate on your auto loan.
In other words, you may end up paying more over the course of your auto loan simply because you chose to get it from a dealership rather than directly from a lender.
Taking out an auto loan from an online lender is another option. If you choose this option, you can complete the entire financing process online from the comfort of your own home, which makes it incredibly convenient.
Many online lenders also show you offers from various lenders so you can compare quotes side-by-side. This makes it easy for you to quickly find the best deal you qualify for.
What to Look for When Choosing An Auto Loan
There are a number of factors you should consider when deciding which lender to obtain an auto loan from, including:
- Annual Percentage Rate (APR)
- Loan Term
- Monthly Payment
- Penalties and Fees
- Additional Coverage Options
Annual Percentage Rate (APR)
The annual percentage rate, or APR, is one of the most important factors to consider when comparing your loan options. The APR is the annual cost of borrowing money expressed as a percentage of the principal. It is the total annual cost of borrowing money, which means it includes interest and other fees associated with your loan.
It’s crucial to choose a lender that offers a low APR. The lower the APR, the less you will pay over the course of your auto loan. As you compare loan offers, it’s important to recognize that even a slightly lower APR could save you hundreds or thousands of dollars over the course of the loan.
Some lenders will also offer special deals such as 0% APR on new auto loans for a specific number of months. Deals like these can drastically lower the total cost of your auto loan.
A loan term is the length of the loan often expressed in months. For example, if you take out an auto loan that has a term of 36 months, this means you have 36 months, or 3 years, to pay off your debt.
Many people assume that the loan term isn’t a significant factor to consider when comparing auto loan options, but that’s not the case. The length of your auto loan can impact your monthly payment and the total cost of your loan.
For instance, if you choose a loan with a longer term, you will have more time to repay the money you borrow, which means your monthly payments could be lower. However, the longer the term, the more you will pay in interest, so the total cost of the loan may be higher. Keep this in mind when deciding which loan is right for you.
The monthly payment is the amount you will need to pay on your auto loan every month. This is another important factor to consider when comparing auto loan quotes from different lenders.
A number of factors impact the size of your monthly payment, including the APR and the loan term. In general, the lower the APR, the lower the monthly payment. This is because you are paying less interest on your loan every month. On the other hand, the shorter the loan term, the greater the monthly payment can be. This is because you must make larger payments to pay off your loan within the shorter loan term.
Make sure you don’t choose an auto loan with a monthly payment that you cannot afford. This could put you at a greater risk of defaulting, which can impact your credit and lead to the repossession of your vehicle.
Penalties and Fees
You should also learn more about the penalties and fees associated with each loan when comparing quotes from different lenders.
For instance, some lenders charge prepayment penalties, which are penalties that borrowers incur for paying their loan off earlier than expected. If you choose a lender that charges this fee, you will be charged for paying off your auto loan before your term expires.
Processing fees can vary from lender-to-lender, too. A processing fee is what the lender charges to process your application for an auto loan. Some lenders charge a flat processing fee for all new auto loans, whereas others charge a percentage of your loan principal instead. The latter option can drastically increase the total cost of your loan, which is why you need to learn about these fees before signing on the dotted line.
Additional Coverage Options
If you are still trying to choose a lender, you should research what additional coverage options they offer. Some lenders allow borrowers to customize their auto loan by adding extra coverage options, whereas others do not.
For example, a lender may give you the option of adding a guaranteed asset protection (GAP) waiver or GAP insurance to your auto loan. This insurance can help you pay off the remaining balance on your auto loan under certain conditions, such as in the event your car is totaled or stolen.
In addition to GAP waivers or insurance, lenders may offer extended warranties (vehicle service contracts) and/or powertrain coverage options. Adding this type of protection can increase the total cost of your auto loan, but it can pay off in the long run. For instance, if you are ever involved in an accident and your insurance doesn’t cover the total amount of your loan–having GAP coverage can save you thousands of dollars.
If you’re ready to finance a new or used vehicle, LoanCenter can help. You can complete the entire financing process online, which makes applying for an auto loan easier than ever before. Fill out this short form to get pre-qualified for an auto loan today.