When it comes to cars, I’m an owner, not a leaser. I’ve always purchased from a private owner, not a dealership, and I tend to keep my car until it just stops running. So, when it came time to shop for my first new (ish) car from a dealership, I found myself wishing I had an expert to talk to about my car loan.
Lucky for you, I did find that loan expert, just not in time for my car purchase. And when I say expert, I mean Nick Brooks, Vice President of Lending at IAA Credit Union. Nick took some time answer the questions I wish I’d been able to ask someone before my last car purchase.
What type of interest rate should I be looking for in a car loan? I know my credit comes into play, but what would you consider too high?
Nick: Rates are determined by several factors:
- Credit Score
- Year of the vehicle (typically older / used cars have higher rates)
- Loan to value (how much are you borrowing in relation to the value of the car)
- Term of the loan (36months / 48 months / 60 months / 72 months / 84 months)
- Auto manufacturer incentives (rebate vs. 0% etc.)
- Current economic conditions
All that being said, it’s hard to say what specific rate you should be looking for because everyone’s application is unique to them. I would encourage individuals shopping for a new car to get pre-approved prior to starting your search. Pre-approval will give you the confidence to know what you can afford and what it will cost you.
What are the benefits of using a local credit union instead of a large bank for an auto loan?
Nick: There are several benefits to using your local credit union when it comes to financing an auto purchase. Credit Union employees will take the time to understand what you are looking for in your auto loan as opposed to “selling” you the deal they think you should be in. A typical tactic used at most auto dealers is to find out what payment the customer is looking for. Yes, payment is important, but is it worth taking out a car loan for 7-8 years or doing a lease rather than purchasing your vehicle.
Credit Unions also can offer members extended warranties and guaranteed auto protection (GAP) policies at lower cost than they would typically receive at the dealership. Also, when you use your local credit union for financing, not only will you know who you are making your payments to but you’re also supporting a financial institution that you already do business with. By supporting your local credit union, you are enabling them to offer you additional products and services that you may need in the future.
Are there penalties to paying off your auto loan early?
Nick: In most all instances there are not penalties for paying an auto loan off early. Car loans are usually written as simple interest notes in which the borrower only pays interest for the number of days they have the loan. Of course, all lenders are different so it’s important to ask this question if you’re planning on making more than the minimum monthly payment or if you might trade the vehicle in before the loan is paid in full.
What about re-financing my auto loan? When should I consider this option? What are the benefits?
Nick: Refinancing auto loans is very common. There are 3 main instances in which you would do so:
- If you took the dealer financing at the time of the purchase to qualify for rebates that were being offered. Typically, the rates associated with these loans are higher than you could get at your local credit union. It’s recommended that after you’ve had your car for 60 days that you reach out to see if your credit union can offer you a better rate or terms.
Nick knows his stuff (if you couldn’t tell already from his title), I did this with my car after purchase and it definitely made a difference.)
- If your credit improves after you purchased your vehicle. If your score was 650 at the time of purchase and now it’s 700, you may qualify for a better interest rate.
- At times individuals choose to refinance their cars to gain access to equity that they’ve built overtime. What does that mean? Well, if you need new tires but don’t have the funds to pay for the purchase, you may look to do a cash out refinance to get the money.
The takeaway? Do your research! Your situation is unique, so arm yourself with as much information as you can before you head to the dealer. Have any other tips to share with us? Leave them in the comments!