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Which Type of Auto Loan Is Best for You |  |
With the recent government bailouts, consolidations and refunds in the U.S. auto industry, there’s never been a better time to buy a new vehicle. Every manufacturer is competing for new business and offering buyer incentives and new car deals like never before. You’ve decided that this is the year for a new automobile, and you’ve already picked out which type is for you.
But when purchasing a vehicle, many costs need to be taken into account including auto insurance, upkeep and maintenance, gasoline and much more. Most people will have to borrow money to buy the vehicle and there are many options on how and where to finance. Auto loans are basically one of two types – direct auto loans and indirect auto loans. These types of loans are typically short term (36 to 96 months), because they typically correspond with the lifespan of the vehicle. Which type is best for your needs and situation?
Direct auto loans are when the lending institution or bank gives the loan directly to the borrower. The borrower enters into a contract with the car dealership and then uses the money borrowed from the lending institution or bank to pay back the dealership. The benefits of direct lending are being able to find competitive interest rates at banks, credit unions and financial companies. Also, if the borrower already has existing accounts and relationships with financial institutions, he or she usually can secure a loan at a discounted rate. Typically, this type of loan is good for someone who has very good credit. This type of loan is also the only option for buying a new or used vehicle from a private party.
Indirect auto loans are when the car dealership gets the loan for the borrower from the bank or financial institution. The borrower enters into an agreement with the lender and pays the borrowed money over time. The lender can keep the contract or pass it to another financial institution. The benefits of indirect auto loans are being able to take advantage of lowered finance rates offered by the factory/manufacturer. In addition, dealerships sometimes give specific incentive programs for buyers and cash back bonuses. Borrowers also like the convenience of doing the lending at the same place and time of the vehicle purchase, and the dealership does all the paperwork. This is also the most ideal type of loan for a borrower who doesn’t have the best credit.
No matter what type of loan the vehicle buyer applies for, the borrower with the best credit will receive the best finance and interest rate. All auto loans include interest, and the longer the loan, the lower the monthly payments. The lending institution or bank will be the primary lien holder until the loan and interest are completely paid back. After the terms of the contract are complete, the borrower will receive the auto title.
Like every loan, all potential borrowers should do their research before entering into any financial contract. If the buyer’s credit history isn’t the greatest, try to pay down debt and pay off credit cards at least six months before the vehicle purchase. Also, if there’s the option to use a co-signer to get a better finance rate, utilize that person. And don’t forget about the expensive down payment, title, tax and license fees due upfront as well. There are many lending institutions willing to compete for your business, so make sure you get the best possible interest rate. It is your decision to choose between the direct auto loan and indirect auto loan, and it should be based upon your personal preferences and financial situation.