Saving up for a car is a reasonable option but it won’t work if the car is needed urgently. For example, you were offered a dream job, but it will be difficult without your own car. Now the car of your dreams is not cheap. But while you’re saving up, the car can get even more expensive — and you’ll have to pay more.
The logical solution is an auto loan. But how to choose a solution that will not punch a hole in your budget?
How does an auto loan differ from a regular personal loan?
An auto loan is a purpose loan and it has its own characteristics.
The car itself serves as collateral. That is, you will not be able to sell or exchange the car without the consent of the bank until you pay off the loan. If you stop making payments or systematically delay payments, the bank has the right to take the car and sell it to pay off your debt.
A purpose loan implies that you are given money for a specific purchase. Most often, the bank pays the car seller directly and the buyer does not get the money on hand. But there are cases when money is given to the borrower. If he or she spends this money on something else, the bank may demand to return the entire loan + interest ahead of time.
In addition, offers for auto loans often imply a specific program: for example, only for a new car or even for a specific model. If you choose a car that does not meet the program’s conditions, you may not be approved for the loan or offered other conditions.
Usually, when you get a loan, you need to pay for auto insurance. It will help both you and the bank reduce the risk of losing money if something happens to the car (you get into an accident or it is stolen).
In addition to auto insurance, you may be offered to insure your life and health — this is also a way for the bank to reduce the risk that you will not be able to repay the debt if something happens to you.
Banks often offer to include insurance in the cost of the loan. You should bear in mind that in this case, it will cost you more — because the price of policies will also be charged interest.
Where and how can I get an auto loan?
When you choose a car, you probably study its technical characteristics and compare many options. The same should be done with an auto loan, especially since it is not necessary to go to the bank for it — you can apply for an auto loan online (through a bank or a microfinance institution).
But first, soberly assess your strength: decide how much you can pay without compromising the family budget. Usually, it is not recommended to spend more than 30% of the monthly family budget for loan repayment.
Go to the bank
The main advantage of applying to the bank is that you can get a loan and then go to any car dealership or even buy a second-hand car.
- If you go to a bank or a microfinance institution for a loan, be sure to check whether it has a license;
- Do not forget to read the general rules of lending (you can find them on the official website or view them in the office);
- Prepare the documents needed for a car loan. The list of the required documents can also be found on the official website of the bank or viewed in the office;
- Choose a car from a car dealership or from someone who sells a used car. Sign a sales agreement. Make sure that it contains a non-cash payment method and the seller’s account details. Make a down payment if necessary;
- After that, the bank will transfer the money to the seller’s account specified in the contract. Now you can get your car.
By the way, if you previously had no credit or poor credit, you can check into refinancing your auto loan after several years to see if you receive better offers.
Go to a car dealership
If you take out a loan from a car dealership, you will most likely be tied to a specific bank or will be able to choose from only a few partner banks. But you can count on favorable terms of a car loan for some models or complete sets.
Select a car from the dealership
- Ask your manager or consultant what partner banks you have and how you can get a loan. At this stage, be sure to specify whether the terms of the loan that you are interested in apply to the car you have chosen. Some credit offers may only apply to certain models or configurations;
- Submit your documents. Each bank has its own list of documents. You can also find out the bank’s requirements on its official website or in its office. Most often, you need an identity document, driver’s license, a completed application form and proof of income;
- When the application is approved, check the final loan terms and conditions (the loan term, APR, additional fees. If everything is in order, you can make an initial payment and fulfill other obligations provided for in the contract. If you do not want to overpay for insurance, pay for it separately, and do not include it in the loan amount;
- When the loan agreement is concluded, you can proceed to the registration of the act of acceptance and transfer of the car itself.
Go to the bank from the car manufacturer
You can take a loan from a bank from an automaker — in the so-called captive bank. Usually, such banks offer lower rates.
A captive bank provides a loan in the same way (read above).
What you should pay attention to
- The first thing to consider: a loan for a used car can be more expensive because they come with higher interest rates, and you still need to purchase car insurance;
- Do not forget about compulsory and additional life insurance — these points should be specified in the loan agreement. At the same time, the bank usually recommends certain insurance companies. If you decide to buy insurance from other insurers, the terms of the contract may change;
- Another important point is a down payment. You can also take a loan without a down payment, but you need more documents for it. You will have to prove to the bank that you will be able to repay this loan;
- Read the contract carefully. Check whether the characteristics of the car are specified correctly, including the color and number. If something is not clear, please specify so that you do not find any hidden payments and additional fees-for example, “for car selection services”. Of course, when buying a car, do not forget to carefully inspect the car itself;
- Carefully read the general and individual terms of the car loan, especially the insurance provisions.