Read on to learn about loan term lengths, interest rates, where to finance, saving for a down payment and co-borrowers.
For many people, their first lending experience is when purchasing a car. Since few young people have cash on hand for a purchase so large, an auto loan is a way to establish credit while fitting vehicle ownership into the monthly budget. But, the basic consumer lending process can seem mysterious and daunting. Let us take some of the mystery away by walking you through the process and offering some tips.
The down payment
The first thing to help ensure the best car buying experience is to plan well in advance, so you can save for a down payment. Typically when seeking a loan, it’s nice to have a 10-20% down payment. Many lenders require it. This can make a significant difference in your monthly payment. Saving funds for a car takes discipline, but there are some ways to make it easier. Start by setting up an automatic savings plan, so each month a predetermined amount will be transferred into your savings account. Having a savings plan in place makes fitting that loan repayment into the budget easier, too.
About loan term length
Once you’ve saved for a down payment and established how you will fit a car payment into your budget, it’s important to learn about auto loan term lengths. While car loans used to be paid out in either three or five year terms, the vehicle market and financial environment has changed over the last few years. At The Bank of Missouri (TBOM), we offer different term options based on the age of the vehicle and its mileage. The older the vehicle, the shorter the term. This helps the borrower pay down the vehicle as it depreciates. It will also help protect the borrower from owing more than it is worth when it comes time to trade it in.
While a longer term can be easier on the monthly budget, keep in mind that it’s possible you may need to keep the car for at least the length of your loan term. You may love the car now, but before taking out a loan for six years, consider if you will still love the car that far into the future. The risk with a longer term is the value of the car might depreciate more quickly than the balance on the loan is paid off, potentially eliminating any equity or even resulting in owing more than the vehicle is worth. This may not be an issue if you keep the car until the loan is paid in full, but if you decide to trade early it could make getting into a different vehicle more challenging. To help avoid this, research how well your intended vehicle holds its value.
Also, while newer cars will cost more than older cars, older cars come with higher interest rates. This is because the value of a used car is more uncertain. It’s more likely a used car could have an underlying issue due to wear and tear, while a new car is fresh from the manufacturer. Every buyer must weigh the pros and cons of a higher priced new car or a used car with higher interest.
Where to finance
Knowing what loan terms are and how they work will help when you seek financing. You’ll need to decide between dealer financing or bank financing. Though a dealership may be able to grant 0% financing for a particular amount of time, your local banker will look at your whole financial picture. Typically dealerships use larger finance companies, which will pull your credit report and make a decision based upon that information. Whereas a local bank loan officer can sit down with you and really take a look at your finances to make sure you will be able to make the monthly payments.
How having a co-borrower works
Another thing to keep in mind when applying for that first loan is that you may need a co-borrower if you don’t have established credit. A co-borrower is someone who already has a positive established credit record and is willing to help you obtain your loan. It’s important for the co-borrower to know that they are equally obligated to pay back the loan if your circumstances change and you cannot fulfill the commitment. Co-borrowers can be a parent, spouse or family member. Though some lenders will accept a friend as a co-borrower, we don’t recommend putting potential financial stress on a friendship.
Learn more about consumer loans at The Bank of Missouri
We hope this basic outline of the auto lending process helps as you embark on building your credit and purchasing a vehicle. Understanding how to budget for a down payment, the differences in lenders, term lengths and co-borrowers will give you the knowledge needed to follow the process with confidence. We hope we’ve removed some of the mystery surrounding auto loans. Our best tip to look out for you is to send you to the banker you already know and trust to help with your financing needs. Know your budget, what you can afford and plan well so you can enjoy the process of buying your vehicle and establish credit for the future.