7 Things Everyone Should Know About Car Loans
Thinking about buying a new car soon? Unless you have thousands of dollars lying around, you’re probably planning on applying for a car loan. If you’re feeling a little lost navigating the world of car loans, you’ve come to the right place! This article breaks down all the terminology and basic car loan information that every shopper needs to know.
1. What Is A Car Loan?
Put simply, a car loan is a type of — you guessed it — loan that you can use to purchase a vehicle.
Car loans are different from other types of personal loans (like the loan you took out because you needed that one of a kind jacket!) because they are secured. This means the car acts as collateral, and the lender will take it back and sell it if you cannot keep up with the loan payments.
2. What Types of Loans Can You Get?
You may know what a car loan is, but did you know that there are different types?
Lenders may offer car loans as either fixed or variable. Here are some important distinctions to help you differentiate between the two:
Fixed-Rate Loan
A fixed-rate loan, as the name suggests, has set numbers for the interest rate and the loan repayment. These numbers won't change for the entire duration of the loan, and you’ll always know exactly what you’re paying month after month.
If you don’t want to worry about your loan repayment fluctuating every month (most borrowers don’t), a fixed-rate loan is your best and most stable option. That doesn’t mean variable-rate loans don’t have merit, though.
Variable-Rate Loan
When you take out a variable-rate loan, the cost of your car loan repayments and the loan’s interest rate can (and likely will) change. When interest rates go up, the repayments will go up. When interest rates fall, the repayments will fall.
Lots of factors contribute to interest rates rising and falling, including changes in the supply and demand for credit. Inflation plays a role in changing interest rates, too, as does the government.
At first, you might wonder why anyone would want to take the variable-rate route. After all, why would someone want a less consistent loan?
However, a bonus to this type of loan is that they typically don’t come with an early exit fee. This means you can pay the loan back early without any penalties. This allows you to boost your credit score and avoid carrying debt around longer than you need to.
If you don’t want to worry about your loan repayment fluctuating every month (most borrowers don’t), a fixed-rate loan is your best and most stable option.
3. What Is an Interest Rate?
If you have a credit card or have ever taken out any other type of loan, you’re familiar with interest.
To quickly refresh your memory, though, an interest rate is a specific amount of money that a lender charges a borrower. It is a percentage of the principal (the total amount loaned for the car purchase).
When it comes to car loans, two rates are shown: the annual percentage rate or comparison rate, which includes the interest plus other fees associated with the loan, and the interest rate itself.
It’s always best to know whether you’re looking at the comparison rate or the interest rate alone when comparing loans. That way, you don’t get hit with any unpleasant surprises when you’re finalizing things with the lender.
4. What Are Repayments?
A repayment is a regular instalment that you will make toward paying back the total amount borrowed to buy a new (or new-to-you) car.
Most of the time, car repayments are monthly payments. However, some lenders allow borrowers to make weekly or fortnightly repayments.
If you have the means to make more frequent payments, by all means (no pun intended), do. These more frequent payments will help you to pay the loan off faster and save you from paying more than you need to in interest.
5. Characteristics of a Good Car Loan
If you’ve never taken out a car loan before, it can be a bit tricky to figure out whether or not the loan you’ve been offered is a good one. Here are a few signs that indicate you’re getting treated fairly by the lender:
The loan is for a sufficient amount (so you can get the type of car you want, within reason)
The loan has a low interest rate
The loan comes with low (or no) fees
The loan comes with a reasonable repayment schedule
A good loan will have reasonable modification terms, too. Let’s say you need to adjust your repayment amount or want to pay off the loan early. Ideally, the lender will allow you to do this with minimal effort.
6. What Factors Do Lenders Consider?
One of the keys to getting a good car loan is knowing what lenders are looking for in a borrower. In general, the more of the following that you meet, the better your ability to qualify for favourable car loans:
High credit score
High income and low expenses
Large down payment
No short term loans
Solid employment history
Each of these factors shows the lender that you are a reliable borrower. The more reliable you seem, the more willing they are to give you money for a new car.
Even if you have a low credit score, all hope is not lost. In fact, many lenders specialize in bad credit car loans and bad credit car finance.
7. What if I Have a Bad Credit Rating?
Even if you have a bad credit score, hope is not lost! In fact, you can still get a really good rate if you work with the right broker. It’s certainly possible, there are just a few small differences in the process.
Primarily you just need to do a little bit of extra work to demonstrate that you have good financial habits (like putting money into savings regularly), which helps show a lender that you have the ability to properly pay off the loan.
Every financial institution will have different credit score requirements for their loans, so don’t be discouraged if you are rejected from the first lender you apply to as Naked Loans can still help as we work with lenders who will help your circumstance.
For a detailed breakdown, check out our other blog How To Get A Car Loan (Even If You Have Bad Credit).
Need a loan? We can help.
When you work with us at Naked Loans, we will guide you through the application process without judgement and help you find the best loan for your situation. We have access to over 30 lenders and can get you the best possible deal (some of which aren’t even available to the public).
Not only that, we pride ourselves on our customer service. So you won’t just get a good car loan, the process is incredibly smooth and you might even have fun!
To start the process, you can apply online in 10 minutes. It’s free, it doesn’t affect your credit score and there’s no pushy salesperson forcing you to do anything you don’t want.
Click the button below to get started!