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CarMarket’s Tips on Finding the Best Car Loan for You

Don’t Get Taken "To the Bank" By the Bank

As if you, as a perspective automobile purchaser, did not already know it, new cars can be quite expensive. In fact, the average price of a new car in the United States is around $22,000. Since most people do not have this substantial amount of cash available to purchase the vehicle outright, millions of consumers take out installment loans from a variety of sources on order to finance their purchase. The National Automobile Dealers Association (NADA) estimates that the average new-car loan is roughly $17,000, so shopping around for the best loan could save you plenty of money over the life of the payments. This article will help you to decipher some of the loan lingo and provide you with all of the information necessary to consider the many loan opportunities carefully and eventually secure a loan with great terms.

 

When should I start looking for a loan?

The answer to this question is one of the most important aspects of shopping for a loan. Researching financing options and making certain that you qualify for a loan should be your first steps in the car shopping process. By ascertaining how much money you can loan and how much you will be paying back in installments, your decision on which car to buy is made much simpler. Decide how much you can afford and then go out and find the vehicle that best suits your needs for this price.

 

How should I look for a loan?

You may be surprised just how many options are available for obtaining car loans these days. From traditional sources such as the dealership, credit union, and bank to the less frequently utilized home equity and life insurance loans, there are a plethora of institutions eager to loan money for new cars. The great thing for consumers is that all of these sources can be compared by having them quote you one figure, the Annualized Percentage Rate (APR). The different lenders will probably use different means to figure out your interest payments, but the APR adjusts the actual rates to reflect the loan’s true cost per year. That said, loans from the various sources are basically interchangeable. If two or more lenders have identical rates, choose the one that offers the best service or most convenience. Rest assured that you are not spending any more on the car as long as the APR’s are identical.

You can always get ballpark figures by telephoning around and asking different lenders what there rates are over the telephone. The same sort of information can also be obtained over the Internet. Do not, however, accept these figures as final. When you are sure that you will be obtaining a loan in the relatively near future, go and shop around in person. When you visit the loan officers face to face, then you can really negotiate. And by all means, do not feel hesitant to negotiate with these people. Be aggressive and assertive. Ask the loan officers for their absolute best APR’s, and compare the rate among the lenders. They are not doing you any great favor by loaning you the money. You are doing them the favor by giving them your business and allowing them the opportunity to make money off of you.

 

Who loans money for cars?

Automobile dealerships are a very popular choice for obtaining new car financing because of the convenience factor. It is very nice to be able to walk in the door of the dealership and know that it is the only stop that you will have to make. Most dealerships can approve a loan while you are sitting there, and can also compare rates via phone or fax. This is all very nice, and the surprising part is yet to come. That is, most of the time your retail dollar doesn’t go as far when the convenience factor is involved. This rule of thumb is not necessarily true of car loans, though. Usually, if there is a difference in interest rates between dealers and banks, it is less than one percentage point. While this could still make a difference, the convenience is well worth the nominal increase to some consumers.

Sometimes, in fact, the rates at a dealer are superior to other lender’s because of subsidies that are available to dealers from the vehicle manufacturers. The manufacturers will sometimes offer extremely attractive financing terms in order to wage a price war with competing dealerships. These subsidized dealer loans can often offer you the lowest possible APR. Be careful, however, that the terms of these low APR loans are compatible with your financial situation. Although they do offer low rates, the payment periods of these loans are generally short term (less than two years), and therefore the monthly payments are quite high.

Credit Unions are another excellent source for car loans because their rates are generally lower than those of other lenders. Therefore, if you are a member of a credit union or are eligible to join one in order to get a car loan, it is certainly worth investigating their loan rates. The reason that credit unions are able to offer great loan terms is that they are non-profit entities. This means that they only need to generate enough profit from their members to cover their operating expenses, leading to low cost loans. Because making loans to their members is the least risky means of generating revenue, they are generally willing to do so.

Commercial banks are the final conventional source for car loans. Their appeal is that most people who seek loans from the bank are already customers with checking, savings, or money market accounts with the bank. These customers are familiar with the bank and confident that they are getting the best rate. Unfortunately, commercial banks usually do not offer the lowest rates available. Their rates ordinarily fall between those from the dealer and those from credit unions, making them pretty average. Keep in mind, however, that many of these statements are generalizations of nationwide trends and that the rates in your local market could be quite different. That said, among banks that offer car loans, the smaller banks and savings and loans tend to offer better rates than do larger commercial banks. Once again, it all depends on the competition in your local market.

 

Where else can I get money for a car?

If you have thoroughly investigated all three of the mainstream sources listed above and are still dissatisfied with the APR’s offered, there are still other options to consider. Both of these options, borrowing against your life insurance and home equity loans, offer rates that can be considerably lower than those of conventional lenders.

Owners of whole-, variable-universal, or universal life insurance may be eligible to borrow against the policy’s cash value. The cash value is the amount that the policy pays out to beneficiaries upon your death. Most insurers allow you to borrow against any policy that has cash value except term insurance. The interest on these borrowed funds can be as low as zero, depending on your particular policy. Most, however, fall in the two to three percent ranges, which is still far lower than any other lender, including credit unions. Another perk: You do not have to actually make monthly payments if you do not wish to. If you do not make the payment, the amount is simply deducted from the amount of your policy’s cash value. Naturally, your life insurance policy is unaffected if you make all scheduled payments in full and on time.

The other source of low interest-rate car loans is a home equity loan. These are the ones that you see incessant television commercials for. You can get these loans from a bank, and this is how they work. The bank will loan you up to the amount of equity that you have in your house. Your equity is the difference between the current worth of your house and the amount that you still owe on the mortgage principal. The interest rates are typically lower than the rate that the bank would ordinarily give you. Another enticement is that you may be eligible to deduct the interest amounts that you pay on these loans from your federal and state income taxes! The drawbacks to this type of loan is that transaction costs can nullify any interest savings, and missing payments could lead to forfeiture of your home.



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