Online Auto Financing Information

Financing Options

The purchase of an automobile is a significant expense, which merits serious consideration. Well, let’s assume that you’ve already weighed in the option of walking vs. driving and decided to buy a car. You may or may not already know the kind of vehicle you will be buying and the price range that you deem appropriate – all essential decisions, worthy subjects of other articles. The important choice we’d like to help you consider is how to pay for this purchase: should you pay out of pocket or should you finance it with a loan and what type.

If you happen to have the money on hand, it may be easiest to lay it down and call yourself a proud owner of the means of transportation. Or you might still consider financing. Why, you might ask, would you pay interest for a loan you don’t need? Because your own money can be put to better work. Hypothetically, if your money is invested in a way that earns you 12% interest, and you can get an auto loan at 8% APR, you will be better off keeping your cash invested, taking the loan, and pocketing the extra 4% difference. Or perhaps you’d like to keep the cash handy, just in case.

Whatever your situation, know your options so you can make a better financial decision. You can start the process with checking the rates at your local bank, but more often than not you will find that bank rates are usually higher than what you can get online. Get a few quotes from different lenders before you settle on a provider. From Capital One’s No Obligation Blank Check® to ALoanYes.com’s $500-$250,000 loans, there are a myriad of online loan providers with attractive interest rates and flexible terms.

Types of Auto Loans

The key distinguishing attributes of an auto loan are: the interest rate you will have to pay, the length of time to repay, and whether it is secured or unsecured. Let’s look at each feature in more detail:

Interest rate – a percentage of the sum borrowed which you will need to pay to the lender as a fee. Economists like to call this "the price of money". Interest rates are paid monthly, but quoted as what they would amount per year. Quotes normally show a percent with the acronyms APR (annual percentage rate) or APY (annual percentage yield) next to it. The two are not very different, with APY (also known as "effective rate") being a little more exact because it takes into account the effect of compounding interest daily over a period of one year, which is what virtually every lender does. Of course, lenders prefer to give you quotes in APR, because they are just a fraction of a percent smaller numbers than APY (the opposite is more likely to happen when banks offer you their rates on savings accounts, for example). In the case of a car loan, the interest rate depends on the age of the car (the newer the car, the lower the rate) and also on the loan term (e.g., a 3-year loan will come with a lower rate than a 5-year loan, all else equal).

Loan term – the stipulated length of time to repay the loan. Loans for 12, 24 or 36 months are considered short-term and those for 48, 60 or 72 months long-term. Choosing a short-term loan with cost you a lower rate of interest, but will require a higher monthly payment. On the other hand, a long-term loan will come at a somewhat higher rate, but will make your monthly payment easier on your pocketbook. Three-year and five-year loans are most common for a car purchase. After all, you wouldn't want to be stuck with a car payment after the useful life of your purchase.

Secured vs. unsecured loans – the difference between the two is in what the financial institution will get from you if you default on the loan. Secured loans are normally drawn against the value of your house or other valuable property. Unsecured loans are drawn against your good creditworthiness. From the perspective of lenders, a secured loan is less risky and as such is likely to be offered at a lower interest rate. Secured loans are sometimes the only choice for people with poor or no credit.

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