The Guide to Car Loans (2022)
Loans to buy or refinance a new or used vehicle are among the most common loans available from financial institutions. Car loans generally have much lower interest rates than other types of loans like credit cards and personal loans because they are usually secured loans backed by the car being financed.
In fact, the APR can go as low as 0%, but only for buyers with excellent credit ratings. For borrowers with average or poor credit ratings, interest rates can rise into the double digits. According to Q2 2022 State of the automotive financing market Experian report, is the average auto loan rate 4.33% when buying a new car and 8.62% for used vehicles.
Loan terms for auto financing typically range from 12 to 84 months, but most experts advise against this 84 months car loan and long terms. While these terms can be attractive to borrowers since they come with lower monthly payments, they also tend to come with higher interest rates and create a financial commitment that can extend beyond a car’s prime years.
Types of car loans
In the auto finance industry, borrowers have different situations and needs. As a result, lenders are offering alternative financing options to accommodate them. Many of these loan options are similar products with different names, but understanding their differences can help you get a clearer picture of what to buy.
A purchase loan is a loan for the purchase of a vehicle. Within this category there are three types of loans:
- Loan to buy a new car: This loan is used to buy a new vehicle from an authorized dealer. New car loans are usually cheaper than used car loans.
- Used car purchase credit: This loan is used to buy a used vehicle from an authorized dealer. Many lenders charge higher interest rates for vehicles that are older or have more miles on the odometer.
- Loans from individuals: This type of loan is used to buy a vehicle from a private seller rather than a dealer. Many lenders do not offer private party financing. Those who typically charge higher interest rates, as these loans are considered slightly more risky than traditional purchase loans.
A lease contract is essentially a rental contract for a car, except that after the contract ends, you may have the option to buy the car. There are two types of lease loans:
- lease agreement: A driver gets a car for a set period of time, usually 24 to 36 months, with fixed monthly payments. The driver must return the vehicle at the end of the agreement, but often has the option to purchase the vehicle at that point.
- hire purchase: A driver can secure a lease buyout loan to purchase their leased vehicle at the end of the term if they choose to purchase.
If you Refinance car loan, take out a new loan to replace your existing one. There are two main types of auto refinance loans:
- Standard Refinance: This is a loan that pays off your current one, often with a different term, interest rate, or both. If you can get a lower one Refinance car loan interest rate or higher monthly installments with a shorter term, you can reduce the amount of interest to be paid. You can also get lower monthly car payments by extending your term, but doing so will increase your overall interest payments.
- Cash-out refinancing: With this type of loan, you withdraw equity from your vehicle in the form of cash when you refinance. This increases your LTV ratio and usually extends your loan life.
Where to find car loans
Car loans are popular financial products, so you can find them just about anywhere. Borrowing options have different features and benefits that may appeal to different borrowers.
Banking is still a popular choice for car financing. Traditional banks generally offer competitive interest rates, but may have more stringent credit requirements than other options. Many banks offer people who have other accounts with the company, such as B. checking accounts, savings accounts or credit cards, discounts.
Credit unions are similar to banks, but are member-owned organizations rather than for-profit commercial financial institutions. These organizations often have more lenient credit requirements than banks and may have lower interest rates. Most credit unions require membership, but many allow you to join in exchange for a small donation to the credit union or a charity.
Auto dealerships often have internal financing options that may offer lower interest rates than some banks and credit unions. Bigger brand retailers can even offer 0% APR car deals on new cars to buyers with excellent credit ratings.
Independent dealers, sometimes referred to as BHPH (buy-here, pay-here) dealers, may also have their own financing options. While these vehicle loans may be accessible to borrowers with poor credit ratings, many of them come with sky-high interest rates. It is also common for BHPH dealers to install tracking devices on vehicles which they fund and charge for this service.
At a time when people buy practically everything online, car loans are also widely available over the internet. Some of these online companies are direct lenders backed by banks, while others are loan brokers looking for financing options for you. And some are lending marketplaces that allow you to post your needs and information online and wait for lenders to send you offers.
Online loans have made it easy to compare loan offers. Applying online can be a quick and easy process. You may even get quotes or approvals in minutes, if not instantaneously.