Questions and Answers About Auto Loans

Getting the right auto loan is a matter of shopping around and knowing as much as possible about auto loans before you take one from the car dealership's lenders or any other lender. The Internet makes it easy to comparison shop for auto loans, you can fill out online forms and applications that go to multiple lending sources at once, and then compare the offers that come back. But before you do, you may have questions. Here are some common questions about auto loans, and the answers.

How much should I borrow?

The answer to this is in your own finances, you should calculate how much you can afford for a monthly payment and what your future financial goals are. Even if your budget can handle a payment like $400.00 a month for payments, you might ask yourself if that will still allow you to continue putting money in savings for future financial goals. Other factors that might influence how much you want to borrow include your target vehicle price and the amount of cash or trade in you will have available to pay upfront. Also, the amount you pay monthly will be based not only on the total amount borrowed, but on the interest rate on your loan.

How Do I Know What Kind of Interest Rate My Loan Will Have?

Interest rates are decided by lenders based on a number of variables, like credit history and score, income and other debts. Many auto dealers and financers offer special low interest financing to what the call qualified buyers. Being a qualified buyer generally means having a very high credit score and healthy income level. Check your credit score; if it is high enough you may qualify for the best of interest rates available. While you will not know for certain what interest rates are available to you until lenders make offers, if you have a fair or better credit rating you can take the current average credit rating and estimate what your payments might be using a calculator.

What is the Difference Between Direct and Indirect Financing?

Direct financing is also known as dealer financing. When you apply for a loan at the dealership it is granted by one of their affiliates and the money for the vehicle purchase goes directly to the dealership. In some cases this can be very bad for the consumer, if both the dealership and their financer have their own best interest in mind and not yours. You also seldom get to deal directly with the lender yourself and seldom get to compare loan offers. With indirect financing you take a loan from a lender not associated with the auto dealer and receive a check or voucher for the amount of the loan. This allows you to compare offers from multiple lenders and get the best financing available to you.