What You Need to Know About Auto Financing

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Before purchasing a car, consider auto financing. Some dealerships offer in-house financing, also known as “buy here pay here” financing, which is specifically designed for people with bad credit. While this type of financing may offer lower down payments and interest rates, it is not a smart option if you need the funds for a down payment. Additionally, if you wait until you’ve fallen in love with a car, you may be faced with less-than-ideal loan terms. Instead, preapproval can help you negotiate for better terms.

Down payment

There are several advantages to putting a down payment on your car loan. The larger the down payment, the closer you’ll be to actually own the vehicle outright. Ideally, you should have a down payment of at least 20%, but even if you can’t afford 20%, it will still reduce your monthly payment. On average, every $1,000 you put down on a new car will result in a $15 reduction in your monthly payment. And a larger down payment will result in lower interest rates, so you’ll be paying less in interest over time.

The amount of down payment you put down on your car will depend on your credit score. Although it will not directly affect whether you’re approved for financing, your credit score will play a part in the overall amount of the loan. Having a higher down payment will help you qualify for the lowest loan amount, even if your credit score is lower. And, you can always trade in your old car if you don’t like it.

Interest rate

The interest rate on auto financing varies widely, and you’ll want to shop around to find the lowest one. In the past, the auto-finance company loan rates were significantly lower than those offered by commercial banks. These days, automakers are using captive finance arms to provide car loans. This allows them to offer lower rates because the purchase of cars is the parent company’s primary source of revenue. To make your search easier, here are some tips to keep in mind:

A good rule of thumb is to go for a loan term of at least six months longer than the vehicle’s expected lifespan. New cars have shorter repayment terms, and 60 months is the norm. Auto loans for newer cars have shorter terms, which save money on interest and help prevent borrowers from ending up underwater. Older cars lose value and are more risky for lenders, so their interest rates reflect this. In addition, interest rates for used cars tend to be higher than those for newer vehicles.

Loan duration

The average length of an auto loan varies widely depending on the borrower’s credit. Nonprime borrowers’ loan terms average 69.7 months, while those with top credit score take out loans with shorter terms. In fact, the average length of a loan for new-car financing is just over 72 months, while the average lease term is about three years. Nonetheless, the length of auto loans is still increasing as more people seek financing.

LTV

Loan to value, or LTV, is the ratio of the amount of money a person borrows compared to the market value of a car. It serves as an important measure of the risk of a loan and shows how much the lender is willing to cushion a risk by referring to the car’s value. While the LTV on a home is less than 20%, a car’s LTV should be around 80% or lower.

As a general rule, a higher LTV means greater risk for a lender. As a result, lenders may charge higher interest rates, which will ultimately increase the monthly payments and overall cost of the loan. However, if you can make a larger down payment, you can avoid this problem. If you can’t afford to put more money down, you can always try to negotiate a lower LTV. If your LTV is too high, you may not qualify for the loan.

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