How to Finance a Car and Factors to Consider
When you want to purchase a vehicle, there are many things to consider. Whether that’s the price, how to finance a car or truck, 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 you can’t take lightly.
You probably also have many questions about car financing—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, getting a good deal on your auto financing is essential. With that in mind, we’ve put together this quick informational post to explain the process of financing a vehicle and a few things you should consider.
What Is the Best Way to Finance a Car?
One of the main questions we get asked by car buyers 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+|
|Interest Rate Range||Auto loan rates typically start at lower APR than personal loan rates.||Personal loan rates tend to be higher because they don’t require collateral.|
|Payoff Timeline / Loan Term||36 to 84 Months||12 to 60 Months|
|Loan Amount!||Average: $20k (used car), $32k (new car)||Average: $11k|
|*Auto loan rates displayed above are the APR (Annual Percentage Rate) and are accurate as of 1/4/2023. +Personal loan rates displayed above are the APR (Annual Percentage Rate) and are accurate as of 2/2/2023.|
Rates are subject to change at any time.
!Source: WalletHub from February 2023
Use Auto Loans to Purchase Vehicles
To summarize—if you’re only looking to purchase a vehicle and wondering how to finance a car or truck—an auto loan will 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 than to qualify 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 personal or car 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, deciding how to finance a car or other 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.
How Do I Start Financing a Car?
Before financing a car through a personal or car loan, you should check your credit report and credit score. Ensure that there are no inaccuracies or fraudulent activity. Since bank or credit union lenders will check your credit report to determine your auto loan interest rates and eligibility, you will want to ensure it’s accurate. Typically, the higher your credit score, the better interest rate you can receive, and possibly lower monthly loan payments.
It’s also helpful for car buyers to determine how much they can afford to spend on a new vehicle. Some lenders determine how much a person can borrow based on the vehicle’s age and value and your qualifications, such as your credit score, credit history, income, and down payment.
Use a car loan calculator to input the necessary information, like the purchase price, desired car loan term, and the approximate interest rate, and determine your estimated monthly payments. Then, you will know how much you will spend on your new car before you head to the car dealership.
Can I Finance a Car if I Have Bad Credit?
There are options available to you if you want to know how to finance a car if you have bad credit. Having a bad credit score doesn’t mean you’re out of options when searching for an auto loan, but you 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 from online lenders or even dealership financing that seem to move too quickly and easily. You need adequate time to read the disclosures, ask questions about the financing terms, and understand the loan agreement. This is why we advocate for auto financing through a trusted credit union like Lanco Federal Credit Union, where you know you’ll get fair terms and the best deal possible.
If your credit score isn’t the best, you may still be able to attain fair terms on vehicle financing. That’s because an auto loan is more secure to lenders than a personal loan since you have collateral—the vehicle. However, if you have the means to wait until you purchase a vehicle, it may be most beneficial for you to work toward improving your credit score before looking for a new car.
A lower credit score means you will likely have a higher interest rate. Additionally, your debt-to-income ratio may limit how much you can borrow. So, while you might have to let the idea of a brand new vehicle fade away, you may still be able to afford a newer used car with less-than-perfect credit. You can also provide a larger down payment to help lower the amount you’ll need to borrow!
Still Have Questions about How to Finance a Car? Talk to Your Local Credit Union
If you are ready to purchase a vehicle and make your monthly auto loan payment, it’s time to 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 of up to seven years, you’ll get a low monthly payment that works for your budget.
Credit unions are an excellent resource for getting a car loan. They can often offer better interest rates than other auto lenders, making the car-buying process less painful. 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!