Personal Loans

Can You Lease A Car At 16

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 6 minute read

Because cars are so costly (thank you, Captain Obvious), the vast majority of purchasers end up taking out loans to make the purchase. But that complicates things in ways I hadn’t anticipated.

Know the bumps in the road so you may avoid them while looking for a car loan, such as extending the length of your loan for the sake of a cheaper monthly payment. If you don’t do your homework, you might end up getting “taken for a ride” on your next vehicle purchase.

What Exactly Is an Auto Loan?

You may get a car, truck, motorbike, SUV, or specialized vehicle with the help of an auto loan. Yes, even those wacky motorized tricycles you might see once in a while.

To ensure repayment of the loan, the lender will place a lien on your car. Thus, if you fail to make your monthly payments as agreed, the lender may send a “repo guy” to take your vehicle back.

However, there is a silver lining: the interest rate on a secured loan is lower since the bank is taking less of a chance. Borrowing costs are usually proportional to the level of risk, thus if the lender is able to secure some kind of security, they may set their interest rates lower. For this reason, auto loans often have lower interest rates than other types of credit.

Important Terms to Understand

When comparing loans, it’s easy to become lost in the jargon of APRs and loan-to-value ratios. You won’t feel as lost if you already have a basic understanding of the terminology used.

  • The interest rate is a measure of how much money you will have to pay back for using a loan. The rate is stated on a yearly basis.
  • The APR, or annual percentage rate, gives you a comprehensive picture of the total annual cost of a loan. The annual percentage rate (APR) is often a little higher than the interest rate.
  • This is the timeframe within which you are expected to make loan payments.
  • The monthly payment is the amount that must be paid each month to keep the loan in good standing, excluding interest. Remember that you can pay more toward the principal of your loan at any time to reduce your overall repayment period.
  • The principal is the entire amount of money you borrow to pay for the automobile in full. As you make loan repayments, it will gradually decrease.
  • The down payment is the initial sum of money put toward the purchase of a vehicle.
  • The LTV is the maximum amount of money a lender is willing to loan you relative to the car’s purchase price. Basically, LTV is the opposite of a down payment: With a 10% down payment, the lender will cover 90% of the purchase price. So, your LTV is 90%.
  • In the context of loans, the term “total cost” refers to the sum of money you will spend on interest and other fees throughout the course of the loan’s whole duration.

How Car Loans Work

An auto loan can be used to finance the majority of a car’s price, and repayment terms are normally between three and six years. Your monthly payment will decrease, but your interest costs will increase, if you extend the length of your loan. The term of your auto loan should be as short as feasible.

Here’s an example: If you take out a $30,000 car loan at 5% interest for 36 months, you’ll end up paying $2,369. The interest on the identical loan amount spread out over five years is $3,906.

Interest rates for loans with longer repayment terms tend to be higher. If you took out a loan for five years, like in the previous example, you would very certainly spend more than that only on interest.

It is possible to refinance an automobile loan, much like a mortgage. You may be able to reduce your interest rate or monthly payment this way, but the time it takes to pay off your debt may increase.

When you pay off your automobile loan, the lender releases their claim on the vehicle and provides you a release document. Just when you start thinking about the high cost of automotive maintenance, you become the only owner of your vehicle.

Auto Loans: The Various Options

The two most common places to get a vehicle loan are dealerships and direct lenders.
Sometimes, auto lots may offer you an option between attractive financing conditions and a price cut. Generally speaking, it’s wiser to take the reduction offered.

In a perfect world, you’d pay cash for the automobile and take advantage of the discount. If you’re not able to pay cash, there are many alternative places to get a vehicle loan outside the dealership.

Loans can be obtained directly from financial organizations such as banks and credit unions, as well as through internet lenders who specialize in vehicle loans. Get loan quotes from many sources, including your current bank, other banks, credit unions, and online lenders.

Don’t let potential lenders conduct a hard inquiry on your credit record until you’ve decided on a lender and a loan program. After checking your credit, you may orally relay your score to potential lenders. When you’ve decided, you may formally apply for a loan.

Do the work to repair the dings and dents in your credit report. The interest you pay over the life of a loan may add up to hundreds or thousands of dollars, so improving your credit is essential.

Finally, remember that you may get a car loan for both new and old vehicles. Be aware, though, that the rates of interest on used auto loans tend to be higher.

How to Select an Auto Loan

It goes without saying that you should always look for the lending option that has the lowest interest rate and expenses. Well, usually. Instead of offering price reductions as a promotional incentive, some dealerships provide financing with low or even zero percent annual percentage rates.

In most cases, though, you’d be better off haggling for a lower price on the automobile itself and borrowing money from the most affordable direct lender you can find. It’s recommended to use a life-of-loan interest calculator to get an accurate figure to compare to the discount. Pick the alternative that will help you save the most money over time.

Unless absolutely necessary, go for the shortest loan period possible within your financial means. Finally, before you sign on the dotted line, make sure you get a complete list of all expenses from each lender.

What is the average auto loan interest rate?

Mortgage interest rates and auto loan rates both change in response to changes in benchmark index rates like the Fed funds rate or the LIBOR. When interest rates are low, I’ve seen vehicle loan rates as low as 3%, but they may easily reach double digits. The interest rate that you qualify for is also affected by your credit history.

Bottom Line

Purchasing a vehicle is both an exhilarating and nerve-wracking experience. Unfortunately, borrowing money only makes things more “dangerous” without increasing the thrill.

However, it is not hard to do so, and you may save money on your auto loan by comparison shopping and haggling over the conditions. Get quotes from at least five different lenders, then negotiate with the best fit(s).

Before moving forward, you should also check your credit. If your credit history is as beat up as your old beater, you should ask a close family member or friend to co-sign the loan with you.

If finding a cosigner is out of the question, bringing your credit card amounts to less than 30% of your available credit might help your score quickly. The best thing you can do for your credit score and your bank account is to pay off your balances in full as soon as possible.

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