Secured vs. Unsecured Loan: 5 Main Differences

Car Loans

Buying a car is probably one of the most important financial decisions in your life. Whether it is a brand new car or a used car, you will need a large sum of money. Fortunately, car loans and refinancing loan options can help you fulfill your long-awaited dream of owning a car.

 Many Americans rely on auto lending companies. In fact, the statistics report of the Federal Reserve Bank of New York recorded over 200 million car loan accounts in the first quarter of 2022. Although many lending institutions can offer car loans, the amount of money you can receive is limited. It mostly depends on your credit score, income, and loan duration. 

Steps to Get a Car Loan

Getting a car loan is not an easy task. As the lender provides the borrower with a lump sum of money, approving the loan takes a lot of consideration. If you want to purchase a car through a car loan, check out these steps to avail a car loan: 

1.   Set a Budget and Know What You Can Afford

Usually, people set their minds on buying expensive cars without considering their financial capabilities. Yes, car loans may be available, but you need to pay them with interest over a long period. Thus, before asking for an auto loan, set a target monthly payment and loan duration. 

The 20/4/10 principle can be your guide. It states that you should only buy a car if you can pay at least a 20% down payment, pay the loan for four years or less, and car expenses do not exceed 10% of your gross monthly income.  

2.   Determine Credit Score

After setting a budget, determine your credit score. The credit score serves as the lender’s basis on the amount of loan to provide. Moreover, it also determines the corresponding interest rate of the loan. Credit history, income, and current debts/loans can affect the credit score. 

Credit reports contain the data needed to compute credit scores. You can check your annual credit report through the major credit reporting agencies – Equifax, Experian, and TransUnion. Your credit report will give you an idea if you can obtain a good credit score. 

Car loan companies can check different credit scores to evaluate your auto loan. So it is best to maintain a good credit standing. For your reference, credit scores can be classified as: 

• Poor:               300-619
• Fair:                 620-689
• Good:              690-719
• Excellent:        720-850

3.   Check Multiple Auto Lenders and Choose the Best Deal

After checking your credit report and score, the next step is to get a quote from multiple car loan institutions. You can check on banks, credit unions, online lenders, or car dealerships to get a car loan. The top auto lenders listed on this page can also be your guide.  

Lenders will have different offers, which depend on their credit score evaluations. Note that there are car loan institutions that have no minimum credit score requirement, which can help those who have poor credit scores. Moreover, some auto loan companies may restrict your car model choices and the dealership where you can purchase a car. 

Based on the auto lenders’ offers, analyze their pros and cons and choose the one that gives the best deal for you.

4.   Obtain Pre-Approval of the Car Loan and Shop

With a pre-approved auto loan, you get a more accurate estimate of the loan amount and interest rate. So, you will have a clearer idea about the price of the car you can buy. That said, you can now visit car dealerships and shop for your desired car. Also, a pre-approved car loan can give you more negotiating powers at the car dealership. 

It is best to get pre-approved by two to three car loan lenders by applying to them within 14 days. The pre-approval process requires a hard credit pull, which lowers your credit score. But if two or three lenders will check your credit report within a short span of time, it will only count as one. 

5.   Analyze Offer and Finalize Loan

Sometimes, car dealerships challenge their customers’ pre-approved loans. They can even offer lower interest rates. So after choosing the car you want, you can also apply for the dealership’s car loan offer. Then, you can compare it with your pre-approved loans. But if you have already set your mind with your pre-approved loan outside the dealership, say that you are a cash buyer. That way, you can negotiate on the car’s price and not on its monthly payment. 

The process of finalizing the car loan usually differs from lender to lender. Thus, make sure to follow your lenders’ instructions. The car dealership will probably contact the car loan company to initiate funding. Also, in signing the contract, ensure that you have reviewed and understood the terms and conditions of the auto loan.  

Refinancing Car Loans

If a borrower did not get favorable car loan terms, refinancing the car loan is the ideal solution. Refinancing a car loan means taking a new loan to get better interest rates or adjust the loan duration favorable to the borrower. 

If you have an outstanding car loan, it is best to refinance car loans when:

1. You have improved your credit score. 
2. Interest rates on car loans have fallen significantly. 
3. Your current car loan terms are not favorable to your finances.  
4. You want to reduce the monthly payment by extending the loan duration. 
5. You want to increase the monthly payment to shorten the loan duration.  

Refinancing a car loan only helps if it saves money in the long run. Lower interest rates but longer loan duration does not always favor the borrower. Don’t hesitate to consult financial experts to be sure.  

Steps to Refinance a Car Loan

 If you have met the conditions stated above, you can follow these steps to refinance your car loan: 

1.   Check Credit Score

Like how you determine your credit score in getting a car loan, you can check your credit data from major credit reporting agencies – Equifax, Experian, and TransUnion. With the data, you can estimate if your score is good enough to refinance a car loan. A credit score of 690-719 (Good) or 720-850 (Excellent) can make refinancing an auto loan favorable to you. 

2.   Assess Car Value

Cars depreciate over time. If your car’s market value is less than your loan’s remaining balance, refinancing the car loan may not be the best option. Moreover, refinancing companies may reject your application due to the car’s depreciated value, especially if it has signs of damage. 

3.   Prepare Documents

If you have decided to continue with refinancing the car loan, prepare these vital documents or information: 

• Social security number
• Driver’s license
• Tax forms for the last two to three years
• Car information (VIN, registration, proof of insurance, mileage)
• Current car loan documents

4.   Get Quotes and Choose the Best Deal

Most car loan companies also offer refinancing loans. So, check your current lender if they can provide better deals through refinancing your car loan. Also, it is important to get quotes from other refinancing institutions to compare rates and offers. 

 After comparing the estimates, allow two to three refinancing companies to check your credit score within 14 days to prevent a decline in your credit score significantly. Then, choose the best deal – may it be a better interest rate or adjusted loan duration. 

 Once you have completed the application, your new lender pays off the remaining balance from your old loan. Then, it will claim ownership of your car for the meantime until you have fully paid them. 

Bottom Line

Many people rely on car loans to purchase their dream car. One can avail of auto loans from banks, credit unions, lending institutions, and car dealerships. In order to get an auto loan, the borrower usually has a good credit score. It is the lender’s basis on the amount and duration of the loan. 

Furthermore, there are times when the borrower wants to get better interest rates or adjust loan duration. Fortunately, refinancing a car loan has also become a norm. It is a type of loan that can pay off your current car loan to acquire better loan terms.

Now you have learned about car loans and refinancing a car loan. Hopefully, you can maximize the lessons presented here as you avail a car loan or a refinancing service for your next car purchase.