car loans

Posted : February 28, 2018
Last Updated : February 28, 2018

car loans

There are many decisions you must make before purchasing or leasing a car. The Federal Trade Commission (FTC) has many publications that can help you. Call the FTC (1-877-FTC-HELP) to request a copy of its brochures or download them from FTC’s website:

Factors Car Loans Car Leases
Ownership potential
  • The car belongs to you and the bank that gave you the loan until you have paid off the loan.
  • Then the car becomes yours.
  • You’re essentially renting the car from the dealership. The lease is like a rental agreement. You make monthly payments to the dealership for a set number of months.
  • The car does not belong to you. When the lease ends, you have to return the car to the dealership.
  • You may decide to purchase the car at the end of the lease. However, the total cost generally ends up being more than it would have been if you’d bought the car.
Wear and tear
  • No additional costs for wear and tear are included in your loan agreement.
  • Most leases charge you extra money for any damage found at the end of the lease that goes beyond normal wear and tear.
Monthly payments
  • Payments are higher, but you only pay them for a set term. Then you own the car.
  • Payments are lower because you aren’t purchasing the car; the dealership still owns it.
  • As long as you lease a car you’ll continue to make monthly payments.
Mileage limitations
  • There are no mileage restrictions.
  • Leases restrict the number of miles you can drive the car each year.
  • If you exceed the mileage allowed you have to pay the dealer for each mile over the limit, according to your lease.
  • For example, a dealer may charge you 15 cents for every mile that you drive over 24,000 miles in two years. If you drive the car an additional 3,000 miles, you’d then owe the dealer $450 for those miles.
Auto Insurance*
  • It’s usually less expensive than auto insurance for leased cars.
  • Insurance may cost more during the loan than it will after the loan is repaid because the lender may require more coverage.
  • It usually costs more if you lease a car than it does if you buy.
  • Most car leases require you to carry higher levels of coverage than purchase agreements do.
  • Some insurance carriers may also consider leasing to be higher risk than purchasing.
  • Purchasing a car is usually more cost effective if you plan to keep the car long term.
  • However, in the short term, the costs will probably be greater
  • A lease will probably cost less than a car loan in the short term because your total loan amount and monthly payments are likely to be lower.

*Make sure you find out what the requirements are and get a cost estimate from your insurance company before you decide whether to lease or buy.

Financing a Car

Your car becomes the collateral for the loan, which means the lender will hold the car title (indicating who owns the car) until the loan is paid off. If you don’t pay off the loan, the bank can repossess the car and sell it to get the remaining loan amount back.

New car loans typically last three to seven years, and used car loans typically last two to five years. Know exactly how much you’re paying for the car and exactly how much you need to borrow.

When Dealers Offer Low Interest Rates

Dealers sometimes offer low loan rates and other special promotions. However, to get the lowest advertised rate, you might have to:
  • Make a large down payment.
  • Agree to a short loan term, usually three years or less.
  • Have an excellent credit history.
  • Pay a participation fee (money some dealer finance companies might charge to get a low interest rate).

Ads promising high trade-in allowances and free or low-cost options may help you shop, but finding the best deal requires careful comparisons. Many factors determine whether a special offer provides genuine savings. The interest rate, for example, is only part of the car dealer’s financing package. Terms like the amount of the down payment also affect the total financing cost.

Questions to Ask About Low Interest Loans

A call or visit to a dealer should help clarify details about low interest loans. Consider asking these questions:
  • Will you be charged a higher price for the car to qualify for the low-rate financing? Would the price be lower if you paid cash or supplied your own financing from your bank or credit union?
  • Does the financing require a larger than normal down payment? Perhaps 25 or 30 percent?
  • Are there limits on the length of the loan? Are you required to repay the loan in a condensed period of time, say 24 or 36 months?
  • Is there a significant balloon payment – possibly several thousand dollars – due at the end of the loan?

Other Special Promotions

Asking questions like these can help you determine whether special promotions offer genuine value:
  • Does the advertised trade-in allowance apply to all cars, regardless of their condition? Are there any deductions for high mileage, dents, or rust?
  • Does the larger trade-in allowance make the cost of the new car higher than it would be without the trade in? You might be giving back the big trade-in allowance by paying more for the new car.
  • Is the dealer who offers a high trade-in allowance and free or low-cost options giving you a better price on the car than another dealer who doesn’t offer promotions?
  • Does the dealer’s invoice reflect the actual amount that the dealer pays the manufacturer? You can consult consumer or automotive publications for information about what the dealer pays.

Auto Service Contracts

A service contract is a promise to perform (or pay for) certain repairs or services. Though it’s sometimes called an extended warranty, a service contract isn’t a warranty. A service contract may be arranged at any time and always costs extra; a warranty comes with a new car and is included in the original price.

Used Car: Warranty Protection

When shopping for a used car, look for a Buyer’s Guide sticker posted on the car’s side window. This sticker is required by the FTC on all used cars sold by dealers. It tells whether a service contract is available. It also indicates whether the vehicle is being sold:
  • With a warranty.
  • With implied warranties only.
  • “As is.”

Auto Financing Tips

  • Order a copy of your credit report and correct any errors several months before shopping for a car.
  • Shop around for auto financing before going to the dealer. Get pre-approved for a loan by a bank or credit union.
  • Compare APRs from local banks, thrifts, credit unions, and online lenders.
  • Make the largest down payment you can.
  • Consider paying for the tags, title, and taxes separately, rather than financing them.
  • Negotiate the best price on the car if you’re going to apply for a loan at the dealership.
  • Be aware of penalties. Some lenders might charge you a pre-payment penalty for paying off your loan early.
  • Ask whether you’ll get your deposit back, if required, and you change your mind. If so, get it in writing.
  • Be aware that service contracts, credit insurance, extended warranties, and other options aren’t required and can be costly over the term of the loan.
  • Be wary of ads that promise loans for people with bad credit.

Structuring a Car Loan

Make as large as a down payment as you can so you can borrow less money and pay less in interest. Pick a repayment period that makes sense for you. As a guideline, you should be cautious about taking on an auto loan term of five years or more. If you must take on a five- to seven-year loan, it’s quite possible you’re buying more car than you can afford.

Beware of Car Title Loans

Title loans are short-term (usually one month) loans that allow you to use your car as collateral to borrow money. They may sound like a good way to get quick cash, but they can be very costly.


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