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Auto Loans 101


Auto Loans 101

If you’re in the market for a new or used vehicle, chances are you are going to need an auto loan.

Your auto loan will affect your monthly budget for the full term of the loan, so it’s important to do your research and make an informed decision before finalizing it. Here’s all you need to know about auto loans and how to choose the one that’s best for you.

How do auto loans work?

Auto loans make it possible for consumers to purchase a new car without having all the cash on hand when buying. With a car loan from a financial institution or private lender, you’ll receive the funds you need to purchase the vehicle in one lump sum, which you’ll pay a portion of back each month, with interest, over the term of the loan, which generally lasts 5-7 years.

Now that you have an overview of what an auto loan is, how do you apply?

There are two primary sources for auto loans:

  • Direct Lenders: This includes financial institutions like banks, credit unions, or online lenders. You’ll have the opportunity to get pre-approved for a vehicle loan through these lenders, which can make your car shopping quick and easy.
  • Dealership financing: This option enables you to purchase and finance your car in one location. Convenience aside, a dealership loan may be accompanied by a higher interest rate and enticing offers for upcharge add-ons and/or extra protection that may not be worth the price.

Let’s talk monthly payments:

Your monthly payment amount will be determined by several key factors.

  • The loan amount: The amount you borrow will be equal to the value of the car you’re purchasing, or significantly less. A great minimizer of the overall cost is making a sizable down payment and/or trading in your old vehicle when buying a new car.
  • The annual percentage rate: Usually referred to as the APR, this is the effective interest rate you pay on your loan. Your interest rate is determined by your credit score and other general creditworthiness or financial wellness factors.
  • The loan term: The default length of most auto loans is five years, but some lenders offer t stretch the term to seven years or even longer. A longer-term loan means paying less each month, but it also means paying more in overall interest throughout the life of the loan. A shorter-term loan also means you’ll own the car fair and clear sooner.

How can I score the lowest interest rate on my auto loan?

The interest rate on your auto loan will directly affect your monthly payments throughout the loan term, so it’s important to make the effort to score the lowest rate possible.

  • Take your time when shopping around for a lender. Don’t accept the first offer you receive for an auto loan. Get quotes from several lenders to find the one that offers the lowest interest rate.
  • Boost your credit score before applying for a loan: In the months before you apply for an auto loan, take steps to boost your credit score. Ensure you’re paying your credit cards on time, work to pay down outstanding balances, and refrain from opening new lines of credit.
  • Borrow less than you qualify for: While it’s tempting to max out your eligibility, consider borrowing less than you qualify for when taking out an auto loan. A smaller loan generally means a lower interest rate as well.
  • Save up for a bigger down payment: If you don’t have a substantial down payment saved up, you may want to delay your auto loan application until you can save more, borrow less and qualify for a lower interest payment.

Effective September 1, 2021, you could qualify for auto loan rates as low as 2.19% APR* when you apply for an auto loan with Coastline Federal Credit Union.

*APR = Annual Percentage Rate. Published rate effective as of 09/01/21. 2.19% rate includes a 0.25% discount for automatic payments from a Coastline FCU account with direct deposit. All loans are subject to credit approval. Rates are based on credit history and may vary. Rates, terms and APR are subject to change without notice. Applicants must become members prior to or at loan disbursement. Membership eligibility required.