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Home » Auto Loans » Auto Loans: Car Financing for New and Used Vehicles

Auto Loans: Car Financing for New and Used Vehicles

January 5, 2019 by Brian Allen

In the market to buy a new or used car and get the best auto loans rate? Perhaps you’re even considering refinancing your car loan? Listen, finding the best car loan rates isn’t always easy. There are several factors at play, which ultimately determine your rates. Our ultimate guide to auto loans can help you understand which car loan is right for you and help you find the lowest auto loan rate possible.

Whether it’s a family car or a two-seater sports model, car loans are one of the best ways to help you secure that dream drive easily. Before you start comparing auto loan rates, be sure you have a complete understanding of how car financing works. The knowledge you’ll learn in this guide will help you choose a car loan that gets you up and driving fast AND saves you money in the long run!


Table of Contents
 [show]
  • Car Loan Requirements
  • Types Of Financing
    • Variable Rate Auto Loans
    • Fixed Rate Auto Loans
    • Secured Auto Loans
      • Disadvantages
    • Unsecured Car Loan
  • Bad Credit Car Loans
  • The Best Car Loan Rates

Requirements For A Car Loan

Just like any other loan, several factors are taken into account before getting approved with a car loan. Your eligibility depends on the following documentation:

Proof Of Identity

When applying for a car loan, it is important to prepare all the necessary documents to prove your identity. Some of the most common types of identity you can provide include an identification card with your signature, passport, birth certificate, and even utility bills. It is essential that all details in your proof of identity match to avoid any conflict.

Proof Of Income

To qualify for a car loan, you have to provide evidence that you have a stable source of income. Typically, borrowers can present pay stubs from the past few months or copies of recent tax returns. Bank statements and collateral, such as cars or other properties can also be used as proof of income.

Credit History Report

Lenders will also take a good look at your credit history. This is to ensure that you have the ability to pay off your debt on time. If you have a good credit score, your chances of getting approved will be relatively high. However, if previous loans negatively affect your credit history, chances are, you will be denied a car loan application. Be sure to maintain a good credit standing in order to qualify for the best auto loan rates. In the event you don’t have good or excellent credit, most lenders have bad credit car loans available as well.

Proof Of Insurance

In some cases, proof of insurance is needed before you can take out a loan. While it’s not always necessary, it wouldn’t hurt to have insurance ready ahead of your purchase to increase your chances of getting approved. It will also give you plenty of time to search for offers that will suit your needs.


Types Of Car Financing Available

The main types of car financing you will find for personal use are:  variable rate car loans, fixed rate car loans, secured car loans, unsecured car loans and bad credit car loans.  Understanding the types of car financing will help you determine your financing needs (and hopefully save you money!

Variable Rate Auto Loans

What is a variable rate car loan?A variable rate car loan offers an interest rate that is dependent on the lender. It can fluctuate anytime during the duration of your loan, thus affecting the amount of your repayment. When the interest rate changes, your monthly payment goes up. Borrowers under this loan might find it hard to budget their payments, especially since it can change each month. Typically, variable loans tend to have lower interest rates compared to other types of vehicle financing. This is partly because of the risks that come along with it, such as unstable interest rates. However, this type of loan can be beneficial for those who plan to settle their loan quickly. Not many drivers will choose this option, mainly because you will need to be aggressive in paying the loan off quickly. Therefore, if you don’t plan on paying your auto loan off in a short period of time, avoid this financing option and go with a fixed-rate auto loan. Also, you’ll probably want to have a really good credit score.

Requirements

As with any loan, there are certain requirements you’ll need to meet in order to be eligible.

  • Proof of income
  • Proof of insurance
  • Proof of identity
  • Proof of residency
  • Trade-in documentation (if applicable)

While not a requirement, it’s best to have great credit and a healthy monthly budget if you choose this option.

Advantages

  • Gives you the advantage of a low interest rate, typically for the first year only in most cases
  • It’s a great option if you plan to pay the car loan off early

Disadvantages

While this type of financing does have it’s advantages, it also comes with a down-side. Here are the main disadvantages:

  • The interest rate can change during the life of the loan, based on the U.S prime interest rate
  • Without loan rate caps, you don’t know how much interest you’ll be charged over the long run
  • Without a good car loan calculator, it’s questionable how much you’ll pay in interest over the payment term

Fixed Rate Auto Loans

As the name implies, a fixed car loan features a fixed interest rate during the entirety of the payment term. This means that the cost will not be affected by any fluctuations and will have a standardized monthly payment. If you are looking for a loan rate that won’t change over the life of the loan, this is your best bet. A fixed rate car loan makes it easier for a borrower to budget monthly payments, as the payment will remain the same throughout the life of the loan.

Requirements

  • Proof of income
  • Proof of insurance
  • Proof of identity
  • Proof of residency
  • Trade-in documentation (if applicable)

Advantages

There are several advantages to a fixed-rate car loan.  First and foremost, you’ll find advantages such as:

  • Fixed-rate car loans can have a positive impact on your credit score, once paid off and provided you have positive payment history
  • Interest rate remains the same throughout the life of the loan.  This helps you manage your money easier, knowing exactly how much your car payment will be every month

Disadvantages

For the majority of consumers, you won’t find many disadvantages to a fixed-rate car loan. However, it depends on your financial situation and how soon you plan to pay the loan off.


Secured Auto Loans

Secured car loans is a type of car financing most people typically get when they finance a vehicle.  With a secure auto loan, the lender uses your collateral to offset their risk. Collateral can be anything of value, but is usually the vehicle you are financing.  Depending on the situation, some people use their home as collateral. If you choose a HELOC, for example, it’s possible you can claim this as tax deductible income.   Of course, it depends on your financial situation.

Requirements

  • Proof of income
  • Proof of insurance
  • Proof of identity
  • Proof of residency
  • Trade-in documentation (if applicable)
  • Collateral used for the loan

Advantages

There are a few advantages of having a secured auto loan.  Namely:

Looser Financing Terms

Because you’re putting up collateral, lenders typically are more flexible on financing terms. There’s essentially less risk involved for the lender. This flexibility translates into saving you more money in in the long run.

Lower Income Requirements

A secured auto loan is a great option if you have lower income. Here’s why: Since you’re putting collateral up, the lender has less risk and is more willing to proceed with an auto loan.  

Tax Deductible Income

In certain cases, you can deduct the interest paid from a secured auto loan on your taxes. Typically, the income from a personal loan is not tax-deductible. However, if you choose to use your home as collateral (HELOC, line of credit, etc), the interest paid may be tax-deductible. This is a general rule of thumb. Check with your accountant or tax specialist to confirm if this strategy will work in your situation.

Lower Interest Rates

Shopping for the best rates on an auto loan?  Secured auto loans typically have the lowest interest rates out there.  Why? Again, it’s because the lender has collateral to offset their loan risk.

Disadvantages

  • If you fail to make payments, your collateral (home, etc) becomes vulnerable
  • If you select a longer loan period, the interest rate on your secured auto loan could inflate

Unsecured Car Loan

An unsecured car loan, on the other hand, does not require any form of collateral. However, you must be able to prove your capability of paying off the debt in a timely manner. Borrowers with a good credit score can benefit from this type of loan. Typically, lenders check your credit history and other financial details, such as savings and previous loans. It is worth noting though that unsecured car loans tend to have higher interest rates but offer greater flexibility.

Requirements

  • Proof of income
  • Proof of insurance
  • Proof of identity
  • Proof of residency
  • Trade-in documentation (if applicable)

Advantages

  • Since you aren’t putting up collateral, the car is yours, free and clear
  • Full coverage auto insurance isn’t required, which could save you money every month
  • Your loan is not limited to the value of the vehicle

Disadvantages

  • Unsecured auto loans are more difficult to get
  • Interest rates tend to be higher without collateral

How to Get a Bad Credit Car Loan

Shopping for a car loan with bad credit? Don’t rule yourself out just yet.  There are several vehicle financing options available to people with bad credit. Even though you may have poor credit, certain banks and lenders will still happily give you an auto loan. The reason is simple. The lender will most likely give you a secured auto loan — which means you’ll essentially put the financed vehicle up for collateral.  In the event you can’t pay your car loan, the lender can simply repossess your vehicle. This helps lenders mitigate their risk when financing people in bad credit situations.

Check your credit score

The first thing you’ll want to do is check your credit score.  You’ll want to know where you stand, financially. Don’t worry if your score is low.  Lenders will still work with you.

Save up for a down payment

Most lenders will want to see some form of a down payment.  The amount of a down payment needed depends on the type of vehicle you’re financing. Most lenders like to see a downpayment of 5-10% on average. However, many lenders (and even dealerships) will take whatever you may have for a downpayment. Again, it really depends on the type of vehicle (new, used, etc), the lender and/or car dealership.

Shop for secured auto loan rates

Because you have bad credit, most lenders will likely offer you a secured auto loan and use the vehicle for collateral.  Knowing this, you should compare secured auto loan rates from multiple banks and lenders.


Find The Best Car Loans

Regardless of your reason for buying a car — be it a growing family, first time driver, or you want your dream car — it’s best to take your time and consider all factors accordingly. Getting financial assistance for your dream ride can be quite beneficial, especially if done correctly. Here are some practical tips you can apply in choosing the right car loan.

How Much Can You Afford to Borrow?

Before applying for a car loan, it’s best to determine how much money you want to borrow. Once you know the amount of loan you need, be sure to stick with it at all cost. While it’s true that it could be tempting to accept higher offers from lenders, it is essential to consider it’s long-term consequences. Going over your budget might put you in a more difficult situation. That being said, never overextend yourself financially and only borrow what you can pay. It is also worth noting that a car is a depreciating asset and could lose its value over time. So if you don’t want to end up owing more money than your car’s worth, be sure to stick with your budget.

Compare Auto Loan Rate Terms

Another factor you have to consider is the loan term. Depending on your needs and capability to pay, decide whether you want a short or long-term loan. Typically, a shorter loan tends to have higher monthly repayments. A longer loan, on the other hand, offers lower monthly repayments but with more interest. As much as possible, go for a shorter loan. While it could be a bit challenging to pay the higher fees, the amount you can save from a higher interest rate on a longer loan is definitely worth it. It is essential to know the interest rate and other charges that come with vehicle financing. If you feel like the interest rate is too much for you, look for other offers that fit your budget. You should also take a closer look at your loan disclosure statement. This will help you determine any hidden and added charges, such as establishment fees, early repayment fees, missed payments fees, and annual fees.

Filed Under: Auto Loans

About Brian Allen

Brian Allen has been helping people make smarter financial decisions for over 10 years. As the Editor-in-Chief for Goloans, Brian writes about sage financial advice, "how to" articles, and reviews about lenders and creditors.

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