Auto Loans, Mobility, and Your Ability to Pursue Opportunities

It’s no secret that we Americans love our cars. Just look at how we design our shopping centers, subdivisions, and office parks. For many people, owning a car is essential not just for running errands, but also so they can work at jobs farther from home that could open the door to a better life.

Auto loans are often key to increasing your physical and economic mobility. To get one, you have to work with a lender who reviews details about you and the car you want to buy while they decide if they’re willing to work with you. But you get a say, too. 

You decide who you work with, and how much you pay for an auto loan. Getting the best deal often comes down to understanding the factors lenders consider, and proactively preparing for every stage of the car-buying process.

Auto loans and mobility often go hand in hand

Many places in the U.S., especially in suburban and rural areas, were designed with car owners in mind. When community centers are more than walking distance away and public transportation isn't readily available, cars are a must. 

Driving gives you access to more employment opportunities, especially if you work in industries that require you to be on-site. So car ownership is often quite literally tied to your ability to earn money and improve the quality of your life.

In this context, taking out an auto loan makes perfect sense. But, as with any debt, finding the best deal on auto loans requires you to compare offers from several lenders.

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Factors that affect your eligibility for an auto loan

Here are a few key factors lenders use to determine whether borrowers qualify for auto loans and what rate they get:

• Income: An auto loan is a type of debt, so lenders want to know you have a reliable source of income and can pay it back.

• Other debts: Lenders want to know about your other debts, such as mortgages or credit card debt, because these payments affect how much money is left over for your auto loan payments. 

• Credit score: Lenders use credit scores to get insight into how you've handled borrowed money in the past. Higher credit scores translate to lower interest rates on auto loans, while low credit scores usually bring a higher cost. The reason is simple, and it’s not personal. The data shows that people with lower credit scores are more likely than people with higher scores to default on their debt.

• Make and model of the car: Lenders use cars as collateral in auto loans. Collateral is something of value that lenders can take and sell if the borrower doesn't make the loan payments. They need to know the details of the car you want to buy to decide if it's suitable collateral, and how much to approve you for.

• Down payment: A down payment reduces the amount you need to borrow.

• Race or ethnicity: Data shows that racial minorities often pay more for car loans, due to discrimination in the auto loan market. Taking some of the steps described below can help mitigate this.

How to get a great deal on an auto loan

Here are some tips you can use to get a good deal on an auto loan:

Get pre-approved for an auto loan

Getting a car loan from a dealership is an option, but it's important to compare offers from multiple lenders before choosing one. Banks and credit unions offer car loans, too, and so do online car sale sites. It’s your money, so it’s worth it to find the best deal that will cost you the least.

You can request what's called a loan preapproval from these lenders. You fill out an application, and the lender tells you the size and interest rate of the loan it would offer you based on the factors outlined above. 

The preapproval is usually good for a month or two. If you decide to proceed with the loan during the preapproval period, the lender usually honors the agreement, as long the information on your application is still accurate. If the preapproval expires, you may need to submit a new application, or consider working with a different lender.

Having preapproval letters in hand from a dealership’s lending partners can help you get a better deal when negotiating.

Review the auto loan terms carefully before committing

Read through the loan agreement carefully to make sure you understand what you're signing up for. If anything seems amiss, or if there’s something you don’t understand, address it with the dealer right away. It may help to bring along someone who is familiar with cars and auto loans if you're not sure what to look for.

Ask for the Truth in Lending Act disclosures for your transaction. This tells you key details about your loan, including:

• Annual percentage rate (APR): This tells you the yearly cost of borrowing, including the interest rate and any mandatory fees.

• Finance charge: This tells you the total amount of interest and fees over the lifetime of the loan if you make all payments on time.

• Amount financed: This is the amount you're borrowing. If you're making a down payment, it's the total cost of the car minus the down payment.

• Total of payments: This tells you how much you'll pay in total over the lifetime of the loan. This includes repayment of principal—the amount you borrowed—and interest.

Don’t sign the auto loan agreement until you've read through these disclosures and you're comfortable with the loan terms. 

Focus on the overall cost of the auto loan

Low monthly payments can be a good thing, especially if they fit your monthly budget. However, it may take longer to pay off the loan, and you could pay more overall. Take a look at the whole picture by considering all of the following:

• The duration of the loan

• The interest rate

• The full cost of the car

Generally, you want to look for a shorter loan term with a larger monthly payment if your goal is to pay off your auto loan as quickly as possible. But it's totally fine to go with a lower monthly payment if that fits your budget better. You can always shorten the loan term later by making extra payments if you find you have cash to spare, or by refinancing the debt.

Think carefully before buying  auto loan add-ons

Dealers may try to sell you on extras, like VIN etching (a theft protection tool) or extended warranties. These might sound appealing, but it's important to remember that the dealer isn't the only place that offers these benefits, and it might not be the cheapest either.

Research any add-ons the dealer offers you and the cost of having the same service done elsewhere before committing to anything. Some lenders employ high-pressure sales tactics. Knowing this in advance can help you better stand your ground.

• If you want to reduce your debt, a debt relief program could help.

Protect your mobility and your financial future

An auto loan is debt, but it's also an investment in your future. By shopping around and understanding what lenders look for in a borrower, you'll be better able to get the financing you need at a price that fits your budget.

Visit our blogs to learn more about auto loans and how to better manage your debt.