Traditionally, a secured loan refers to a loan that requires collateral - an asset of some kind that is accepted as security. The same goes for a car loan, where the vehicle itself is considered the collateral. You can be granted a car loan directly from a dealership however, banks, credit unions and online lenders equally offer this form of loan.
When contracting a secured auto loan, you can benefit from more advantageous interest rates than you would a personal loan for example. Generally speaking, for a new car, one can obtain an APR as low as 3.24% and 4.08% for a used one. Monthly payments can be as short as 24 months but can also go up to 84 in certain cases.
There’s no need to beat around the bush - your credit score is the main determining factor in the car loan rates you obtain. The better your score, the better your rate. Safe to say your best bet is shopping around and taking a look at the different requirements for approval, interest rates and repayment terms. Ask the dealership if they offer pre-approval, which will allow you to view the interest rates and payment plans you qualify for without directly affecting your credit score.
A good credit score, usually around 700, widens your horizons in a few ways, notably your interest rate and amount of money allotted during your loan. You can also usually choose from a larger selection of repayment terms and have access to longer plans. That said, keep in mind that the longer you’re paying your vehicle, the more interest you’ll pay out of pocket as well.
You’d be surprised at how many options are actually available to an individual with bad credit. Online lenders, for example, have become a popular option today. What’s important to take away here is that with a bad credit score, you’ll never obtain a low APR. Before applying for an auto loan, try improving your credit score:
Pay down debt - Prior to applying for a car loan, or any loan for that matter, try paying off as many debts as possible, or even clearing a few accounts entirely. Furthermore, you should stay away from new accounts, such as credit cards, for a few months before applying.
Provide a large down payment - Plan your purchase months in advance and put money aside in order to pay a large down on your vehicle. Doing so will not only allow you to decrease monthly payment amounts but equally allow you to access better interest rates.
Ask family or friends to cosign - If you have a close, trusted family member or friend with a good credit rating that is willing to help you while you get your financial situation together, they can help you qualify. It’s important to note that this person also engages themself responsible in the case of faulty payment on your behalf.
Applying for a car loan is just like applying for any other type of loan - be it a personal loan or a mortgage loan. There are a few steps you can follow:
Look at different lenders - The rule of thumb is to verify terms with at least three different lenders or car dealerships before making a final decision. Ideally, your objective is to find both an interest rate and a monthly payment that fits your income.
Pre-approval - For many lenders, this is often the first step when it comes to applying for a car loan. Pre-approval allows you to see the rates you qualify for without negatively affecting your credit score.
Fill-in your application form - Application is now easier than ever and can all be completed online. Keep in mind that you’ll need certain information and documentation on hand such as your purchase agreement, proof of income and residence as well as your driver's license.
Make payments on your loan agreement - Payments will begin as soon as you are approved for your car loan so make sure you are prepared and ready to go with an organised payment schedule. Think about setting up automatic payment on payday, which will avoid your falling behind.
Individuals with an excellent credit score (above 781) have greater chances of being approved for a 0% interest rate, notably so on offers that often come with new vehicles. Such borrowers are known as “superprime”. A prime borrower may equally be approved with a credit score between 700 and 780.
When dealing with a bad credit score, the objective isn’t to attain perfection but to improve your score in order to reach both an interest rate and monthly payments that fit your budget, that you can afford and that you will respect for the entire duration of your contract.