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Lenders help customers borrow money for a variety of purposes, and not surprisingly, one of these reasons is to buy a vehicle. If you're looking for a loan to buy a car online, you can approach a variety of lenders and receive different terms and rates. Dealers also offer loans, giving people with no other options a way to become mobile and steer their financial situation in the right direction. 

The Difference Between a Car Loan and Other Loan Types

What sets an auto loan apart from an all-purpose bank loan, a personal loan, or a line of credit?

Security: All auto loans are secured, meaning that the vehicle the loan is intended for also serves as the loan’s collateral. While failure to make payments could result in the lender repossessing the vehicle to cover the rest of the obligation, secured loans also result in more favorable interest rates and loan terms.

Low-Credit Friendly: Generally, because a vehicle represents a smaller investment than a house or small business, and because it is obtained via a secured loan, the bar is set much lower. If you have low or poor credit, you can still obtain a reasonable auto loan, whereas this may not be the case for other types of loans. Car loans are also comparatively short, lasting a maximum of around seven years, making them less risky and thus more favorable for customers.

Flexibility: If you want to purchase a car online, an auto loan is a great option because of the flexibility it offers. You can trade in old cars to reduce your obligations to a degree, pay on a more frequent schedule to speed up the loan repayment timeline, or even take a loan that allows you to replace your car mid-term for a different model.

Refinance Car Loan

Refinancing a current car loan is a smart choice for many car owners.  It could help you conceivably pay less over the lifetime of your loan because you’ll trade in your current loan for one with a lower interest rate. You may also be able to renegotiate your repayment terms, helping you spread out the payments for lower monthly payments or condense the payments to help finish off the loan faster.

While you can technically refinance your car loan whenever you want, If you want to get the most out of the deal, think before you leap. Before you refinance your car loan, just make sure of a few things:

  • It’s not best practice to try and refinance before 3 months have passed from the date when you originally took out the loan. Your credit score just took a slight dip from all the credit checking, etc. and you haven’t given yourself enough time to build it back up again or make any improvements. So, it’s not likely that you’ll get a better rate, and you may end up doing more damage than good to your credit score.
  • After 6 months is a much more advisable time to start considering refinancing car loans, and after a year is even more reasonable.
  • If this is the first time that you're buying a car, then definitely wait the full year before refinancing. This will give yourself a chance to prove your creditworthiness to lenders who will then be more likely to give you a much better interest rate the second time around.

Refinancing is also a good option if you are looking to either remove or add a cosigner on your current loan. If you couldn’t get approved for a loan on your own originally, you may have taken out the loan with a cosigner. But the cosigner doesn’t want to be tied to your loan for the entire lifespan of the loan. So, refinancing is an easy way for you and your cosigner to part ways. Additionally, getting rid of a cosigner will reflect better on your credit history.

Or you might want to add a co-borrower to your loan. This might be a business transaction, or it might be your way of dealing with the financial burden of a hefty auto loan. Either way, you can refinance to secure a place at the table for your new friend.

Car Loan Amortization

Car loan amortization is a scary-sounding term that isn’t really as scary as all that. In simple terms, car loan amortization is one type of paying off your auto loan. So, each month when you make a payment to your car loan provider, the payment gets divided into three sections:

  • Principal
  • Interest 
  • Fees

The principal is the actual loan amount that you borrowed to buy the car. The interest is the percentage that the lender charged you to provide you with their services, and the fees are any additional charges that might have come bundled with your loan.

The way car loan amortization works is that the amount of your payment that is allocated to each area is changed gradually over the course of your loan. So, at the beginning of your loan repayment, when the principal balance is still very high, they'll use more of your monthly payment to pay for the interest. As the principal balance gets less over time, the amount of your monthly payment allocated to interest goes down, and the amount allocated to the principal goes up.

How much of a down payment, your interest rate, and the length of your loan will all affect the amortization schedule.

How to Get the Best Car Loan

Optimize Credit: Before attempting to get an auto loan, make sure you know your credit score and thoroughly explore your credit report. By fixing erroneous entries on a credit report before applying for an auto loan, you can potentially save thousands of dollars over your repayment term.

Avoid Thinking Monthly: If you are shopping around online for a suitable loan to buy your car, it's best to think in terms of the total obligation and not just the monthly payment. While a monthly payment may be easier to consider, it does not account for maintenance, insurance, or other financial emergencies. Anyone can "afford" a new sports car in monthly payments, but this is unrealistic because usually, it's only affordable because the duration of the loan has been lengthened to the maximum amount of time available. This heightens the risk of having an underwater loan near the end of the term, where the remaining amount owed is worth more than the car itself, not to mention that by this time, the car is older and is likely to encounter more costs.

Deny the Dealer: Another tip is to use dealership loans as a last resort when making an online purchase. Dealers will grant almost anyone a loan and offer less than reasonable terms. In fact, most of the money that dealerships make off the sale of a car is not from the car itself, but rather the financing. For this reason, dealership loan offers should be avoided unless you're comparing it to a stack of other offers.

Finding the Best Lender for Your Loan Needs

When applying for loans from a variety of sources, it is very important to complete the applications within two weeks of one another. This is because each application is a credit inquiry, which temporarily lowers a credit score. By doing them together, they all count as only a single inquiry, keeping credit scores healthy.

Before buying a car through an online dealer, make sure to shop around for the best deals as well as the loan terms. This might include banks, online lenders, credit unions, peer-to-peer sources, or the dealership itself. 

Stir up the competition by getting proof of your pre-approval, which is basically a blank check from a single lender that illustrates how much it is willing to lend, and at which terms. Having these pre-approval papers handy when dealing with another lender will force it to match or eclipse the offer, or risk the potential borrower walking away. 

Things to Watch Out For

There are a few things to check for in the loan contract before it is finalized. First on the list is prepayment penalties, which restrict your ability to pay back the loan ahead of schedule. These are fees that lenders charge if you make extra payments to reduce the term on your loan, so make sure you know what to expect before signing any contract. 

Another potentially troublesome clause is mandatory binding arbitration, meaning that if you get into a dispute with the lender, it will be settled out of a court of law by an arbitrator. This puts you at a disadvantage.

Variable interest rates might also find their way into an auto loan agreement. These are not all bad but can mean higher interest payments over the life of the loan, depending on how rates evolve over time. Always calculate monthly payments based on the highest rate, if this is the case, or risk getting an unaffordable loan.

Last but not least, it is always important to make sure that any agreed-upon changes to the contract make it into the final version.

Before making any final decisions, take a moment to review the top auto lenders around and choose the one that will help you drive away with that car you’ve always wanted. 

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