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Buying a Car
Shopping for a car can be stressful, as its often one of the most expensive purchases many consumers make, after a home. Many consumers need to secure a loan to purchase a new or used car. That's why it's important to do your research and understand what kind of loan is best for you. Review terms and financing options and consider trading in your old car and service contracts.
When budget planning, remember to factor in the other costs associated with owning a car, such as service, maintenance, and repairs.
What is an Auto Loan?
When you don’t have enough cash to pay for a new or used car, a credit union car loan can help you buy it. An auto loan allows you to borrow money from a lender for the car. You agree to pay back the funds over a set period of time, plus any fees and interest you accrue. The vehicle itself is used as collateral for the loan, meaning the lender can repossess it if you fail to make payments.
How Does an Auto Loan Work?
The kind of loan you secure will depend on your credit score, the length of the loan, and whether you purchase a new or used car. New cars tend to have lower APRs (annual percentage rates), which equates lower overall payments. Be mindful of the length of the loan. Longer loan terms may reduce the monthly payments but increase the total interest paid overtime.
Consider What You Can Afford
Calculating how much you can afford before you visit the dealership can save you money. Creating a budget might be a good way of determining how much you can put down when you purchase the car and then toward a monthly car payment. Don’t forget to include the additional fees that come with protecting and maintaining your car, like insurance, maintenance, gas and parking.
Shop for Auto Financing
If you decide to finance your car, be sure to shop around for the best rate. Car dealers often have contacts with lenders, but the terms may not be the most favorable to you. Contact lenders directly. A credit union can also discuss car loan options with you. Because offers vary, compare the annual percentage rate (APR) and the length of the loan before making a decision.
Do Your Research
Before going to a dealer, know the car model and options you want and how much you're willing to spend. You'll be less likely to feel pressured into making a hasty or expensive decision at the showroom and more likely to get a better deal. Follow these tips to arrive prepared:
- Review publications online.
- Compare models and prices in ads and at dealer showrooms.
- Plan to negotiate on price. Dealers may bargain on their profit margin, often between 10 and 20 percent. Usually, this is the difference between the manufacturer's suggested retail price (MSRP) and the invoice price.
- Consider waiting and ordering your new car if you don't see what you want on the dealer's lot. Sometimes dealers will negotiate to sell their current inventory quickly.
Buying a Car vs. Leasing a Car
Buying a Car vs. Leasing a Car
Before deciding to lease a car, determine how much you can afford to pay before, during, and after the lease. The most common type of auto lease is a closed-end lease. With a closed-end lease, you may return the vehicle at the end of the lease term, pay any end-of-lease cost, and walk away. Leasing a car might allow you to drive a newer car with lower monthly payments but will likely have mileage restrictions. Maintenance costs may also apply, like repairing scratches or dents.
Know the Costs
When purchasing a car, understanding all the costs involved is crucial. After you include your down payment and the trade-in value of your current vehicle, you may still need to secure a loan to pay the remaining costs. To get the best deal, calculate the upfront costs, such as upgraded features, service plans, taxes and title costs. Before deciding on the loan length and payment options, calculate the upfront and maintenance costs to see which choices work best for you and see how much you will pay in total for your auto loan.
Understanding the Terms of Your Auto Loan and the Documents You Will Sign
Once you are approved for a loan you will sign a loan agreement, which outlines the terms of the loan, including the interest rate, loan term, and monthly payments. Additionally, you will review and sign car ownership documents, submit your down payment and finalize any trade-in details. You may also be required to provide proof of insurance. Your first car payment is usually due 30 to 45 days after signing, and many lenders offer autopay options, which may even come with a small discount.
Late or Missed Payments
It’s possible there may be a grace period that allows extra time to pay before being hit with fees for missing a payment. However, if you miss multiple payments in a row, fees may start to be added, and your credit score could take a hit. Your lender will reach out to you and may be able to work with you to catch up on late or missed payments. If you know you may miss a payment, it could help you to reach out before the due date passes to explore solutions such as payment deferment or restructuring.
Repossessions and Liens
When you take out an auto loan, the lender holds a lien on the vehicle. This gives lenders the legal right to repossess your car if you don't keep up with your loan payments or don’t follow the terms of the contract.
Each credit union may set its own policy that will trigger repossession. Some states require notification, but others do not. These conditions of default are included in the loan agreement, which is the contract governing your loan. Be sure to read and understand the terms before signing to avoid any surprises.
If you experience issues with your auto loan or believe your credit union has acted unfairly, you can submit a complaint to the NCUA. Visit our website (Opens new window) to file a formal complaint and ensure your rights are protected.
Servicemember Civil Relief Act (SCRA)
Active duty servicemembers are protected by the Servicemember Civil Relief Act (SCRA) which prohibits car repossessions without a court order for any auto loan contracts or agreements you entered into before your military service. Read more about what rights are available to active-duty service members.
Frequently Asked Questions
The credit union is authorized to charge daily interest on the outstanding balance between your payments. When you make a loan payment, the credit union calculates the interest that has accrued since your last payment and deducts this amount from your current payment. The remaining funds are then applied to the principal of the loan. Additionally, NCUA regulations allow you to pay off your loan early without incurring any penalties. This means you can make payments more frequently than specified in your loan agreement, which ultimately reduces the total interest you will pay over the life of the loan. Review your loan agreement with your credit union if you have any questions about the terms surrounding your loan.
If you forget to pay your auto insurance and your coverage lapses, or if your provider cancels your coverage, the credit union will impose forced-placed insurance. This insurance only protects the credit union's interest by covering the vehicle's value in case of damage, but it does not provide you with the standard coverage typical of regular insurance policies. If you switch insurance providers, ensure that you give the credit union a copy of your new policy. Failing to do so may lead them to assume the vehicle is uninsured and subsequently add forced-placed insurance. Also remember to ask if the credit union has limits on the dollar amount of insurance loss deductibles and be sure to review the terms of your loan agreement with your credit union.
Absolutely! You should feel free to ask the loan officer for clarification of the Truth in Lending Disclosures. These disclosures provide important details such as the interest rate, the total number of payments, payment due dates, the overall cost of the loan including interest, and any late fees that may apply if payments are missed. Additionally, if the loan officer inquiries about your interest in credit life and disability insurance, be sure to ask how it will impact your monthly payments and the total cost over the life of the loan.
Revolving and installment credit are two different types of credit that work in distinct ways. Installment loans and revolving credit are both important parts of your credit history.
- Revolving Credit: You have a credit limit that you can borrow against repeatedly. As you repay the borrowed amount, your available credit is replenished, allowing you to borrow again. You can make minimum monthly payments, but there is no fixed end date for repayment in full.
- Installment Credit: You receive a lump sum of money upfront and repay it in fixed installments over a set period. You make regular, fixed payments until the loan is fully repaid. The loan term is predetermined.
Understanding this distinction is important because while installment loans do not impact your credit utilization ratio, they still pay a role in your overall credit profile and can influence your credit score through factors like payment history and the total amount of debt you have. Revolving credit can offer more financial clues to your behavior because it shows how you manage varying expenses over time. Lenders can see if you consistently pay off your balance or if you carry a high balance from month to month; this can tell a lot about how you will manage future debt that you don’t have yet.