Car Loans are simply secured personal loans that are used solely for the purpose of buying a new or used car. Consumers borrow a specific amount of money they need then repay the debt with interest in equal payments over an agreed term.
Car loans offer the general advantages of being cheaper than the closest alternative form of lending (credit cards) and providing the discipline of a repayment schedule. This means you pay the car off in set regular payments as you drive – steering you towards actually owning your set of wheels at the end of the loan term.
Car loans can be sourced from Banks, Building Societies, Credit Unions and other Finance companies, as well as P2P lenders. You can even get a car loan from the finance arm of major car manufacturers. It is usually a good idea however to shop around and compare car loans before you start shopping around for the car. If you decide to finance your car purchase at the car dealership, make sure you agree on the car price before you start negotiating on the loan.
When applying for a car loan you’ll have to provide details about the car you’re buying, proof of identity and of your ability to make repayments to your possible lender. This means you’ll need to inform them about your income, assets, liabilities and general ability to make payments. You should also check your credit rating before you put in an application. You could try the new GetCreditScore service for a fast turnaround.
Lenders need to check if what you’re saying is true (there are a lot of sneaky people out there!) so you’ll have to provide contact details of people and organisations that can verify this information such as your employer, accountant, past financers or landlord/property manager. The lender may then make calls to these contacts and check your credit history to see if you’re worthy for approval. The time it takes to get approved can depend on a variety of factors, such as whether it is a rare or everyday car you are borrowing for. For a straightforward loan on an everyday car it shouldn’t be more than 48 hours, provided the lender receives all of the information it requires from you in a timely manner.
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Some people like to know whether they’re able to get a car loan before they start car-hunting. They want to know how much to spend and not have to worry about having the price of the vehicle negotiated along with the terms of their loan. That’s why some people seek out pre-approval for a loan – that is, getting approved for a loan (but not actually receiving the money yet) before finding a car. In contrast, the normal process of looking around for cars, getting the price and seeking out loans based on those numbers can be more stressful. Pre-approval is only valid for a limited time; generally one to three months.
Car loans have a set repayment schedule. Many car loans, however, allow the borrower to make extra repayments. Every dollar you repay above the required repayment shortens the life of the loan as well as the overall cost.
The interest rate on car loans varies significantly between different lenders, which is why you should make a comparison to find the best offer. On Canstar’s database at the moment (Sept 2015) car loan interest rates for a typical five-year $25,000 loan vary from a minimum of 5.29% to a maximum of 15.99%. Also, like a mortgage, car loans also offer fixed and variable rates.
If you do decide that a car loan is suitable for you, here are some questions you should be asking when looking to find the best lender.