Mortgage and Loan Strategies Part Two: Vehicle Loans

Many consumers who purchase a vehicle need to finance at least part of the cost of the vehicle, even if it is used. Auto loans, available in a variety of terms, are offered at several types of businesses.

In order to get the best deal, anyone looking for a vehicle loan should shop around and compare the vehicle loans offered at the following locations:

• Personal bank
• Other area banks
• Loan and mortgage lenders
• Online finance agencies
• Car dealerships

How to Select a Vehicle Loan

Knowing what interest rate and term is available at other locations before you go to the auto dealership is important. Being prepared is half the battle. The interest rate is the percentage that is charged on the total amount of the loan. The term is the number of years that the loan will be in effect.

You do not have to acquire your car loan at the dealership unless you want to do so. However, if you are going to acquire your vehicle loan outside of the dealership, you need to select the lender, apply for the vehicle loan, and receive approval before you go to make your purchase.

In fact, some dealerships will offer either a lower interest rate on the loan or a cash rebate up front from the manufacturer. While the rebate may be enticing, it isn't always the best deal. The amount of money that you will borrow determines the amount of money that you will pay in interest over the lifetime of the loan.

Therefore, the larger the sum of money is that you will borrow, the larger the amount of interest that you can save with a lower interest rate. Since you have access to the Internet, you can easily do the comparison by using one of the available finance calculators to determine the total amount of interest that you would pay with each of the interest rates that are being offered. Many finance and credit websites offer free use of these calculators.

The difference between the two total amounts of interest is the amount that you would save. If it is lower than the cash rebate, then the rebate is the better offer. On the other hand, if the interest savings is larger than the cash rebate, then the lower interest rate is the better deal.

Vehicle Loan Terms

Most vehicle loans are available in terms of 3, 4, or 5 years. Longer terms typically come with a lower interest rate. This does not mean that you will pay less money over the course of the loan's term. However, the longer term coupled with the lower interest rate means that your monthly payments will be smaller and therefore, more manageable.

Each monthly payment includes a portion that goes toward the amount of interest that has accrued on the loan balance and a portion that goes to the principal of the loan. The principal of any loan is the total amount of money that has been borrowed less any payments that have been made strictly to the principal. With each payment, the amount of the payment that goes to the interest decreases slightly and the amount of money that goes to the principal increases slightly.

Typically, vehicle loans with shorter terms produce the smallest amount of interest paid. This is due in part to the fact that the amount of the payment that goes to the principal increases at a greater rate than with a longer term. Therefore, the amount of the payment that goes toward the interest decreases at a greater rate as well.

Annual Percentage Rate and Vehicle Loans

However, since other fees typically come into play whenever a loan is involved, it is important to consider the APR of the loan. An APR is the annual percentage rate or the yearly cost of the loan to the consumer. It takes into account not only the interest paid on the loan, but also, any other fees that are incurred with the acquisition of the loan. All lenders are required to provide the APR for any loans that they offer. Higher APRs mean that a higher yearly cost is incurred with the loan attached to it.

Bad Credit Vehicle Loans

Additionally, even if you have a bad credit history, vehicle loans are available to you. In general, the specifics of the loan are a bit less favorable than those attached to a standard vehicle loan. The interest rate attached to a vehicle loan offered to someone with bad credit is higher and the required down payment placed on the vehicle may be larger as well. However, if you have bad credit, you can consider the purchase of a used vehicle for an easier time in acquiring a vehicle loan.

Applying for a Vehicle Loan

To apply and receive approval for a vehicle loan, a credit check will be performed on the applicant. Additionally, you will need to provide the following in most cases:

• Proof of identification
• Proof of employment

To get the best deal for your vehicle loan:

• Shop around for better interest rates.
• Purchase your vehicle near the end of the month. Your negotiating power may be stronger then since sales quotas may not have been met yet.
• Avoid answering the question, 'What would you like your monthly payment to be?' Instead, ask the question, 'What are the different interest rates and terms that you can offer me?'
• Maintain good credit prior to your vehicle purchase. Pay all of your bills on time. Avoid opening new accounts or closing old accounts since this may indicate a cash flow problem.
• Ask about any hidden fees or costs.
• Ask about a prepayment penalty in case you decide to pay the loan off early.

Continue reading: Mortgage and Loan Strategies Part Three: Personal Loans