Auto financing can be intimidating, especially for first-time buyers or people who haven’t bought a car recently. With so much information and misinformation out there, it’s easy to believe myths about auto loans. Understanding these myths can help you improve your finances for your car purchase. This article debunks some common myths about auto financing.
Myth 1: Auto Loans Require Perfect Credit
The idea that you need perfect credit to get a car loan is common. A good credit score can help you get a good loan rate, but it’s not a requirement for a car loan. Many lenders will work with bad credit. In fact, subprime lenders specialize in lending to people with bad credit. However, a bad credit score can increase your loan rate. If possible, check your credit history for inaccuracies and improve your score before applying for a car loan.
Myth 2: Dealers Always Offer Good Loan Terms
Myth: Dealers always offer the best financing terms. Dealers can offer competitive financing, especially with manufacturer promotions or incentives, but not always. Banks and credit unions may offer better rates and terms than dealers. Before choosing a loan, compare offers from different lenders. Pre-approval from a bank or credit union can help you negotiate dealer financing.
Myth 3: Longer the Loan Term, Lower the Monthly Payment
Lower monthly payments can convince customers to opt for the longest loan term. While this technique lowers monthly payments, extending interest payments can significantly increase the cost of the loan. A longer loan term means higher interest payments over time. Your loan can also be “upside down” by exceeding the value of the car. A shorter term increases your monthly payments but lowers your interest rate, allowing you to pay off your car loan faster.
Myth 4: Financing Requires a Large Down Payment
Many people think that auto financing requires a large down payment. A large down payment can reduce your loan amount and monthly payments, but it is not mandatory. Qualified home buyers can get loans with no down payment. However, there are both positive and negative factors to consider. A larger down payment will reduce the principal and interest on the loan, but not everyone can afford it. Make sure you understand the terms of a zero-down loan, as it can increase your monthly payment or interest rate.
Myth 5: Auto Loan Terms Are Non-Negotiable
Many car buyers believe that loan terms are non-negotiable. Loan terms are usually negotiable. Dealers and lenders often give you the opportunity to negotiate the interest rate, the term of the loan, and the total amount financed. Negotiating requires research and preparation. Having another lender pre-approve you can aid in improving the terms.
Myth 6: Applying for Guaranteed Loan Approval
Another myth is that an auto loan application is guaranteed to be accepted. Loan approval is based on your credit history, income, employment, and car value. Even if you meet the initial requirements, the lender may review your application more thoroughly. Keep in mind that pre-approval is not final and be prepared for further documentation or requests.
Myth 7: Interest Rates Matter
While interest rates are important, they are not the only issue with auto financing. Other factors, including the term of the loan, car cost, and fees, also affect the cost of the loan. If you focus solely on interest rates, you may miss other important factors. To understand your loan, read the entire document, including fees and extras.
Myth 8: All Auto Loans Are the Same
Not all auto loans are created equal. Secured and unsecured loans are available at fixed and variable rates. In addition, terms vary widely between lenders and dealers. It is important to understand the differences between these options and choose one that suits your financial situation and aspirations.
Myth 9: Financing is Only Available for New Cars
Myth: Auto loans are only available for new cars. Financing is available for both new and used vehicles. Financing terms for a used car can be higher than for a new car due to depreciation and wear and tear. Before financing a used car, make sure it is in good condition and understand the terms of the loan.
Myth 10: Auto Loans Affect Home Mortgage Applications
Some people think that getting a car loan will affect their mortgage application. Both types of loans require a credit check and a financial assessment, but a car loan cannot prevent you from getting a mortgage. Mortgage lenders take into account your debt-to-income ratio and credit history. Responsible car loan management and a strong credit rating can give your mortgage application a boost.
FAQs:
1. How Much Credit Do I Need to Get a Car Loan?
You don’t have to have good credit to get a car loan. While a higher score can help you get better terms, many lenders will still lend to people with bad credit. If you want a better interest rate, you may want to check your credit score before you apply.
2. Should You Buy or Lease a Car?
Whether you buy or lease a car depends on your personal taste and how much money you have. When you lease, your monthly payments are usually cheaper, but you don’t own the car at the end of the term. Buying a car means paying more, but you own it and don’t have to worry about speed limits.
3. Can I Change the Terms of My Car Loan?
Yes, you can negotiate the interest rate and loan term when you get a car loan. If you’ve already been pre-approved for another loan, this can help you negotiate.
4. Why Pay a Higher Down Payment for a Car?
When you make a larger down payment, you lower the amount you borrow, your monthly payments, and you may even get a better interest rate. It also reduces the chance that you will default on your loan.
5. Can I Get a Car Loan for a Used Car?
Yes, you can get car loans for new and used cars. However, financing terms for used cars can vary, and interest rates may be higher due to the condition of the car and its loss in value.