Learn About Car Loans

There are very few cities where you can't get to work or to school other than having a car. Considering there are nearly 266 million vehicles registered in the United States, there are nearly one vehicle for every person 18 and older. But while people need cars, they rarely have the cash to buy them outright. With used cars averaging $10,000 to $12,000, and new cars averaging $32,000, that means for the majority, car loans are in their future.

Different types of auto loans

Auto loans come in three different types. There are personal loans, which means a bank or credit union loans you money, and provided you make the payments, they don't care what you do with the money. Next there are new and used auto loans. This type of financial arrangement is normally called a secured loan, because you generally don't own the title until the loan is paid off.

In addition, from a bank or credit union's point of view, secured loans may also be pledging collateral to get the loan. For example, you own a practically new ski boat which you inherited from your family. You can pledge the ski-boat as collateral, and generally get a lower interest rate on your loan. (But of course, if you fail to make your payments, say goodbye to your ski-boat which now becomes the banks property.)

Finally, there are credit financing loans, either directly through the dealer, or through a financial institution of the manufacturer, such as Ford Credit. There are also restricted loans, which generally limit the ability of the borrower to pay in certain ways, or to add additional borrowers, but you won't find them too often.

How to Get a Car Loan?

Naturally, the better your credit, the more options you have. If you have a 700 FICA score (the score the credit bureaus assign as to your credit worthiness,) you can get either a new or used car loan practically everywhere. On the other hand, if you have dings in your credit, you may have to put down a substantial down payment, come up with collateral, or settle from buying at a less prestigious loan institution. Generally, banks and credit unions will give you the best loan rates, followed by manufacturer's, with local dealerships own financing the worst.

What to do in advance of buying?

Try to arrange your credit in advance with a bank or credit union. This way, you avoid falling in love with a vehicle you can't afford, and also avoid deciding whether you will trade your current car in to the dealership or sell it yourself. But above all, establish the maximum length of your loan.

Ten years ago, any loan longer than 48 months was considered crazy, but now, 60, 72 and even 84-month auto loans are very common. And that's just begging for financial trouble if you get sick or lose your job. Play it safe and limit your loan length.