How to Finance a Car and Factors to Consider
When it comes to purchasing a new vehicle, there are many things to consider. Whether that’s the price, how you’re going to pay for the car, the cost of monthly payments, or even the type of car you want—it all factors together to result in a decision-making situation that shouldn’t be taken lightly.
You probably also have a lot of questions about auto loans—especially if you’re a first-time car buyer. (Hint: we have the auto loan answers you’re looking for!)
Just as you’re looking for a great deal when shopping for your next vehicle, it’s also essential that you get a good deal on your financing as well.
With that in mind, we’ve put together this quick informational post to explain what goes into the process of financing a vehicle and a few things you should consider.
Should You Get a Personal Loan or Auto Loan?
One of the main questions we get asked is whether you should use a personal loan or auto loan to finance your vehicle. To better answer this question, you first need to understand some of the differences between the two types of loans:
|Auto Loan||Personal Loan|
|Average Interest Rate||3.6% – 15.24%||10.3% – 32%|
|Payoff Timeline / Terms||24 to 72 Months||12 to 84 Months|
|Loan Amount||Average: $20k (used car), $32k (new car)||Average: $11k|
|Sources: Value Penguin and Wallethub from January 2021.|
Use Auto Loans to Purchase Vehicles
To summarize—if you’re only looking to purchase a vehicle—an auto loan is going to be your best and most affordable option. Not only do auto loans tend to have much lower interest rates (you can check out all of our rates online), but you may also find it easier to get approved for an auto loan as compared to qualifying for a personal loan.
On the other hand, if you don’t want your car to be used as collateral for your loan and risk it being repossessed if you can’t make payments, you may feel more comfortable with a personal loan. If you are concerned about repayment before you take out a loan, evaluate whether it’s your financial position or something else making you feel hesitant. Some concerns about your ability to repay may be alleviated by adding debt protection to your loan, which can help cover your payments in scenarios such as unemployment or disability. In any case, making the decision about how to finance your vehicle purchase is all about your goals, credit score, and weighing the pros and cons of each option to determine what works best for you.
What If I Have Bad Credit?
Having a bad credit score doesn’t have to mean you’re out of options when searching for auto loans, but you do need to be careful about where you’re searching for them. Watch out for costs that may be unfavorable to you in the long-term, like really high interest rates, expensive late fees, or even pre-payment penalties. Be wary of loan approvals that seem to move too quickly and easily, especially if you haven’t been given adequate time to read the disclosures, ask questions and understand the loan agreement. This is why we advocate for financing a car through a trusted credit union like Lanco FCU, where you know you’ll get fair terms and the best deal possible.
If your credit score isn’t the best, you’re still likely going to be able to finance a car through us. That’s because an auto loan is more secure to lenders than a personal loan since you have collateral—the vehicle.
A lower credit score simply means you’re going to have a higher interest rate, and you may be limited on how much you can borrow. So, while you might have to let the idea of a brand new 2021 vehicle fade away, you can still afford a newer used car with less than perfect credit. Additionally, if you put enough cash down, you can help lower the amount you’ll need to borrow!
Talk to Your Local Credit Union
Here at Lanco FCU, we offer affordable financing for new or used cars, trucks, SUVs, and motorcycles. With our competitive interest rates and terms up to seven years, you’ll get a low monthly payment that works for your budget.
Credit unions are an excellent resource for getting an auto loan. If you still have questions about how to finance a car within your budget, talk to us or apply online to see what we can do to help!