An auto loan (car loan) is a special form of personal loan, in which a car serves as collateral until the loan amount is repaid in full. In case of non-payment of the loan by the borrower, the bank may demand the sale of the collateral. Loan terms can be different.
A car loan is a targeted loan that is provided by the lender exclusively for the purchase of a car and cannot be spent on anything else. Currently, taking out a loan to buy a car is no more difficult than buying a mobile phone. This type of lending is very popular due to its availability and ease of processing.
A car loan can be obtained not only at a bank but also at a car dealership. This makes it even more accessible to the population. But at the same time, the choice of banks in a car dealership is limited, which often implies inflated interest rates, so you need to look through all offers of banks in advance and choose the most suitable conditions.
Auto loans are becoming more and more affordable. A large number of consumers are ready to borrow money from various banks in order to purchase the desired car. A person no longer needs to save money for many years to fulfill his/her cherished dream.
The main feature of a car loan is that it involves collateral. The purchased car serves as collateral, so the client cannot sell it without the permission of the bank. The client can use the car while the loan is being paid. Since the car belongs to the lender, it is usually compulsory to insure it.
Businesses also successfully use auto loan services. For them, a car loan is one of the ways to effectively use material resources. The purchase of a car by an enterprise under the car loan service makes it possible to instantly operate it for its own purposes. Therefore, the car immediately begins to recoup its value.
The online auto loan service has become very popular. Unlike government auto loans, they can be taken remotely, without leaving home. A potential borrower can fill out a short application 24/7 and send it to the lender for consideration. Our online referral service – itrustfcu.com – saves a person from unnecessary trips to several lenders, many hours of waiting in queues and long waiting for decisions from financial institutions.
Auto loan types
A person cannot always buy a car for cash, and bank employees can easily solve this problem. In the struggle for clients, banks have developed many interesting and tempting car loan programs, which differ significantly in terms of the offered conditions. Currently, there are the following types of car loans: classic, express, trade-in, buy-back, car loans without a down payment, car loans without compulsory insurance, and car loans without interest.
- A classic loan is offered by all car loan banks on standard terms. Currently, this is the most common type of car loan in the USA, which provides for low interest rates and a small initial payment but involves paperwork and, as a rule, compulsory auto insurance. The savings on the interest rate for this type of auto loan are quite noticeable when the cost of the car is high. The classic type of car loan is best suited when buying expensive cars. The advantage of the classic auto loan is long terms. You can borrow funds for up to 10 years. A disadvantage is the fact that you can only buy a new car;
- Express loan is one of the most popular services in the U.S. loan market. The main advantages of this type of auto loan include the speed of application and approval, and little paperwork involved (usual borrowers need a passport and driver’s license). As a rule, this type of car loan is offered only for new cars issued by the partner of the bank providing the loan. It will interest those who want to get a new car on the day of application. This type of loan can be used only by those who will be able to make a large down payment. Since the loan is usually provided for a short period, the interest rate rises by several percent at once. In addition, the borrower pays fairly high commissions for banking services;
- Trade-in is a type of car loan where an old car is used as a down payment. It is also applicable to credit cars, which makes it possible for the borrower to get a new one without repaying the existing auto loan. After diagnosing the technical condition of the car, checking all bases for theft, the price of the car is determined. Further, the cost of the old one is deducted from the cost of the new car, and it is added to the balance of the debt on the loan. Thus, you get rid of the problems with the sale of a used car and buy a new one. According to Memphis Auto Market Getwell, a trade-in option has both advantages and disadvantages. It is a very convenient type of car loan, but not cheap. You have to pay for the convenience.
- Buy-back is a rather difficult type of car loan in terms of understanding and processing. The client makes a down payment, pays a part of the cost of the car. The last payment, which corresponds to the minimum possible value of the car at the expiration of the loan term, is fixed and repaid at the end of the loan term. After the expiration of the term, the client can either pay off the remaining part of the loan and keep the car, or sell it through the Trade-in system and purchase a new model. If the car was returned to the dealer, they are obliged to sell it and pay the remaining amount for the client to the bank. The meaning of the program is that a solvent borrower can constantly drive a new car and change it every 2 – 3 years (this is the period for which the buy-back program is designed). The advantage is low rates. The disadvantage is that the total overpayment is much higher than usual.
- A car loan without a down payment is another preferential form of lending that allows you to buy a car immediately without depositing any money. Usually, this type of auto loan applies only to cars of certain brands, bought in dealerships. Paperwork is standard, you will need proof of income and an ID, however, some banks can provide a car loan for inexpensive cars without a down payment and without proof of income. The borrower must understand that the interest rates will be higher than on standard programs. In addition, a car borrowed without a down payment, as a rule, must be insured against the risks of theft and damage at the expense of the borrower: usually, banks do not allow insurance premiums for such products to be included in the loan amount. At first glance, this type of loan is very attractive, but in the end, you overpay significantly.
- Loan without compulsory insurance is used, as a rule, exclusively for the purchase of used and cheap cars. This type of auto loan is suitable for those who feel confident when driving and are not afraid of accidents, breakdowns and malfunctions in their car. The loan amount is small and the interest rate is extremely high. One of the advantages of this loan is that the client can decide when and how to insure the purchased car.
- An interest-free loan comes with a large down payment (usually 50%), a short term, and large monthly payments. This type of car loan is the best option for those buyers who can immediately pay half the cost of the car. The advantage is that there is no interest. Such a loan product applies only to vehicles that participate in the promotion. Usually, the borrower has to install additional options on the car right away. It can be an expensive alarm and more. This type of auto loan is called interest-free due to the fact that the car dealership assumes the obligation to pay interest payments, making a discount to the buyer in the amount of interest.
- The loan for a used car has more stringent conditions due to all kinds of risks, as often the past of used cars remains unknown. Almost all banks that give this type of car loan set the maximum age of purchased cars or maximum mileage, and also require a copy of the vehicle registration certificate. If you are going to take an auto loan for a used car, then get ready for an increased interest rate, as well as for the payment of car insurance.
What are the pros and cons of auto loans?
The main advantage of a car loan is the ability to buy the vehicle that you want, and not the one which you can afford at the moment. Saving money is a long process, and besides, inflation can significantly devalue savings.
Another important advantage of a car loan is the ability to buy a new car.
When buying a used car, a loan gives you the opportunity to become the owner of a decent car that has undergone pre-sale training and is not much different from a new one.
The main disadvantage of any type of loan is the need to pay large amounts to the bank for many months. The loan increases payments, respectively, when buying a car, you overpay a certain amount for it. Another disadvantage of a car loan from a bank is the complicated procedure for obtaining it. You will have to spend several weeks or even months on it.
Tips and advice on taking out auto loans
Buying a vehicle on credit is a rather serious step that requires a detailed analysis and consideration of all the nuances. No matter what type of car loan you choose, you must always follow such a mandatory rule as a careful study of all signed documents. Any type of auto loan does not tolerate legal illiteracy, so if something confuses you or is not clear, take a copy of the agreement with you and consult with a lawyer. Do not forget to compare this copy with the original later when you sign the contract. Pay special attention to the clause describing penalties that may be imposed by the lender in the event you delay payments.
Credit Union Black Book reminds you that car bought on credit can be used freely but it cannot be sold, returned, exchanged or donated without the permission of the lender – until you fully repay the debt.