When it comes to auto loan shopping, comparing only monthly payments doesn’t tell you the whole story – or what it costs to borrow. When you take out an auto loan from a financial institution, it can be hard to know exactly how to save money on your loan interest rates or any additional fees.
In this post, we’ll help you understand how to compare auto loans, looking at the rates offered and their terms and conditions to find the right car loan for you.
Annual Percentage Rate (APR) and Terms
Let’s start with how APR and loan terms work together. These two factors in tandem determine your monthly payment, as well as the overall cost to borrow the money. APR includes the interest or the price you pay to borrow the money to buy your car in the first place. But that’s not all.
APR also consists of any additional fees that may come attached to your loan, which is why it’s helpful to look at more than just the interest rate on the auto loan in which you’re interested.
Comparing loan terms is also important. While a longer loan term can mean lower payments in the short term, it might also mean paying a higher APR, which could mean you end up paying more in the long term. Note that sometimes, in order to match a monthly payment from another dealer, dealerships might extend your loan even longer, which will also cost you more money.
Generally speaking, if you have good credit, you’ll enjoy lower interest rates, whether you’re borrowing from commercial banks, credit unions, or online lenders. However, each of these types of lenders will vary in the rates they offer, so keep that in mind.
We mentioned that interest is just one part of the true cost of an auto loan. You also need to take into account additional fees, which can include application fees, prepayment penalties, loan processing fees, and documentation or “doc fees” at the dealership.
Car-buying experts Edmunds also caution buyers to remember the additional costs that come from state sales taxes and vehicle registration fees when calculating the total cost of a car.
Loan-to-Value (LTV) Ratio
Another thing to keep in mind when you’re comparing auto loans from various lenders is the kind of downpayment you will be able to make. If you’re prepared to make a considerable down payment or have a car with serious trade-in value, you may be able to take advantage of lower APR because you’re borrowing less than the value of the car in question.
This is called the loan-to-value ratio, or LTV, and it’s another factor that can drive down your APR.
Don’t forget about discounts! Because discounts may be available under some circumstances but not others.
When you’re looking at various lenders, be careful to look at the different discounts that may be available. Some lenders will offer you an APR discount if you schedule automatic payments from a checking or savings account through them.
Additional Products and Services
Not all benefits offered by lenders are financial. Some are simply convenient, such as online banking and mobile banking that allow you to check your loan balance, make payments, and manage your account securely and conveniently.
Other advantages to look for are things like car buying services, where you can shop through approved dealerships that work with your lender, as well as insurance products, such as debt protection, auto insurance, GAP insurance, and extended warranties.
Debt protection insurance reduces the liability of you or your family members under certain qualifying conditions so that you or they do not have to continue making payments if you are unexpectedly unemployed, pass away, or become injured.
GAP insurance covers the difference if your car is totaled while you are still making payments on it, and extended warranties cover repair and maintenance after your dealer warranty expires.
Type of Lender
It’s worth considering which type of lender you’d prefer to borrow from when comparing auto loans. When you finance a car through a credit union, you’re choosing a member-owned nonprofit. That means you’re more likely to enjoy competitive rates that will be lower than those offered by commercial banks or online lenders.
Credit unions pass their profits along to their members, not faraway shareholders. The result is lower interest rates on loans for members! As a credit union member, you belong to a financial institution that is invested in you, not in making money for someone else.
Because they have membership that is based on eligibility, your credit union can offer more personalized customer service and advice. Borrowers can sometimes qualify for loans that they might not qualify for elsewhere based on their credit score, and at more affordable rates and terms.
Auto Loan Comparison Checklist
Now that you know a bit more, here is a handy auto loan comparison checklist based on the factors described above to help you choose the right option for you!
- Available APRs
- Available loan terms
- Fees (application, processing, prepayment penalties, sales tax, registration fees)
- Loan-to-value (LTV) ratio
- Lender discounts
- Available products, services, and benefits
- Type of lender (credit union, bank, or online lender)
If you’re ready to start shopping for a new or used car, 1st Advantage FCU offers auto loans with competitive rates and a variety of products, services, and benefits to help make the loan application and management process a cinch!