In most parts of the United States today, you can’t really get around without a car, but affording that car can be difficult. In fact, Newsweek reports that 60% of Americans can’t afford to buy a new vehicle. That’s why finding low-interest auto financing that works for your budget is more important than ever.
Did you know that credit union car loans can offer some of the best car loan rates? Here at People Driven Credit Union (PCDU), we offer up to 100% financing, low rates, and exclusive promotions on our auto loans. You can learn more here!
Now, let’s explore how to find budget-friendly car financing and how to save on auto loans so that you can get the ride you want without the financial burden.
What Are Car Loans & How Do They Work?
Before diving into the how, let’s ensure you understand the what. A car loan is a type of credit that enables you to borrow from a financial institution to purchase a car. The lender pays the dealer, and you pay the lender back in monthly installments—plus interest.
Here are some important terms:
- Principal. The amount of money you borrow, which the lender uses to calculate interest.
- Interest rate. The percentage of the principal that is owed in interest (the amount you owe to the lender for borrowing their money). Interest rates on car loans are simple, not compound, meaning you’ll owe a flat percentage of the amount borrowed.
- Loan term. The lifespan of a loan, or the number of months over which you spread repayments. The most common car loan terms are 36, 48, 60, 72, and 84 months.
- Annual percentage rate (APR). The annualized interest rate plus any fees charged by the lender. This gives a more comprehensive view of loan costs vs. the interest rate alone.
To illustrate how car loans work, meet Greg, who wants to buy a used car from a local dealer. Greg applies for a car loan online through PDCU. We accept his application and work with him to make everything official for his 48-month loan. He sets up autopay for his monthly installments, and we pay the loan amount to the dealer. Greg finishes up the paperwork with the dealer and drives away in his new car. His autopayments to PCDU begin the following month and last for 48 months. His payment automatically includes the interest for the loan, and the amount doesn’t ever change, so there aren’t any shocks to his monthly budget.
Factors That Affect Loan Affordability
Several factors can impact a loan’s affordability. Keep these in mind when shopping for a loan.
- Credit score and history. The longer your credit history and the higher your credit score, the better interest rate you’ll qualify for, meaning lower monthly payments. Most lenders are looking for a score of at least 600, with mid-600+ being preferable.
- Down payment size. The larger the down payment, the lower the loan amount you need. A smaller loan typically means lower interest rates, monthly payments, and a shorter loan term.
- Loan term. If you will struggle to fit monthly payments into your budget, see if a longer-term loan will work better. You may pay more overall in interest, but the monthly installments will be lower and potentially more manageable. Alternatively, choose a short-term loan if you can pay more per month. You’ll avoid paying more in interest and get out of debt faster.
- Interest rates and how they are determined. There’s more to interest rates than your credit score, down payment, and loan terms. Although those are the main players, don’t forget about the age of the vehicle and your debt-to-income ratio.
How to Find the Best Car Loan Rates
Now that we’ve explored some useful terms and factors to consider when applying for a loan, let’s discuss how to find budget-friendly car financing. Follow these steps, and you’ll be well on your way to a new ride at an affordable price.
1. Assess Your Budget
Before you even test drive new cars, make sure you look at your finances. What can you afford for monthly payments? What about the added costs of insurance, maintenance, and fuel?
- Consider what’s important to you in a car, find a make and model you like, and run the numbers.
- Use a car loan calculator to estimate your monthly payments.
- Map out all expected costs and try incorporating them into your budget.
- Choose a vehicle that you both like and can afford!
2. Check Your Credit Score
You should know your credit score before applying for an auto loan. If it’s below 600, you’ll likely need to boost your financial health before qualifying. If you’re not sure if your score is high enough, consider contacting lenders and asking about their cutoff. If you can’t wait until your credit score improves, look for lenders—like credit unions—who can work with people with lower scores.
3. Shop Around for Lenders
Research, research, research! Look into different types of lenders, including banks, credit unions, online lenders, and the dealers themselves. Read up on reviews, ask friends and family for recommendations, and apply for pre-approvals from your top picks.
4. Negotiate Terms
Once you’ve been pre-approved by several lenders, consider going to your top choice and negotiating the terms if needed. Use pre-approvals from other lenders as leverage to ask for better rates or discounts. Some lenders will match the competition to secure your business.
5. Understand Loan Terms and Fees
Once you’ve selected a lender and been pre-approved, make sure you read the fine print and understand the terms before signing. You don’t want to be surprised by any hidden fees or penalties, like prepayment penalties or credit insurance.
Get Low-Interest Auto Financing From People Driven Credit Union Car Loans
A car is one of the biggest purchases you’ll make, so take the time you need to make an informed decision. Budget, compare, and negotiate auto loans to find the most affordable option that works with your budget. Consider factors such as credit score, loan term, down payment, and interest rates so you can get the best car loan rates available.
Here at PDCU, we help our members prioritize affordability to ensure financial stability. With our competitive interest rates, easy approval process, and exclusive promotions, there’s never been a better time to finance your next Michigan-based vehicle.
Learn more and apply to make that sweet ride you’ve been dreaming about a reality.
