Car Loans 101

If you're feeling overwhelmed by the car buying process, you're not alone. Between finding the right car and the right auto loan, it can be a lot to manage. Unfortunately, it’s not as clear-cut as using a credit card and knowing your credit score, but the finance experts here at instamotor are here to help you make sense of it all.

If this is your first approach at credit, auto loans can be a great place to start. Car loans are a favorable way to demonstrate your payment performance and elevate your credit score. Let's jump into the details.

Pre-Qualification vs Loan Approval

What is a loan pre-qualification?

Before you buy, pre-qualify! When applying for a loan many lenders offer you the ability to get a pre-qualification by performing a soft credit check. By performing a soft credit check lenders can give you estimates of your loan terms, without impacting your credit.

It is important to be thorough and accurate when filling out a pre-qualification application so you can get a real budget for car shopping, and avoid getting your heart set on something you might not be able to afford.

When you get pre-qualified with instamotor we use your social security number in order to provide you the most accurate loan terms possible.

What is a loan approval?

Your final loan approval includes the actual amount you will be approved for, the length of your loan, and your interest rate.

A loan approval requires a hard credit check, that involves verifying the data you provided in your pre-qualification. If you are budget conscious, you may want to work on verifying your pre-qualification before finding on a car, so you can build a deal that works for you.

We've partnered with Plaid, Decision Logic, and Argyle to make verifying your income and employment quick, easy and safe! If the info you provided on your pre-qualification application is current and accurate, your final loan terms will be very close (if not exactly the same) to the terms provided to you in your pre-qualification.

Hard credit checks may impact your credit so we recommend limiting the number of hard checks you have done while shopping to prevent your credit score from being impacted. Read this article to get more details about how to protect while car shopping.

Do I need to get pre-qualified?

Short answer is no, but we recommend it.

Let's face it, your time is important, and car shopping is hard enough. Pre-qualifications are intended to empower you as a shopper. The more accurate the information you provide, the more accurate your pre-qualification will be, and the more you'll be prepared to find the right deal for you.

Down payments

What is a down payment?

In most cases, when buying a used car you will be required to make a down payment as an initial investment in your vehicle. The good news is, you can use a down payment to your advantage.

What is a good down payment?

Typically a good down payment comes out to about 20% of the car’s sticker price, but more is always better if you can manage it.

The larger the down payment, or the more money you pay upfront, the less the loan is going to be and the lower your monthly payment will be (obviously), but it also means your loan will cost your less. You will pay less in interest over the course of your loan, and a big enough down payment can even reduce your actual interest rate, lowering the cost of your loan even more.

How is down payment calculated?

The amount of the down-payment depends on two factors:
1.) Your credit status
2.) The cost of the vehicle you are purchasing

Your credit status determines the minimum down-payment required. Typically, the better the credit, the lower the down-payment required. Lower credit scores are viewed as a higher risk to lenders They will reduce the amount they are willing to lend to higher-risk borrowers. If you are looking to buy a car that costs more than you have been approved for, you can make a larger down payment to bring down the amount you will need to borrow.

As an example, if the vehicle selling price is $15,000, and your maximum approved loan amount is $12,500, the minimum down-payment would be $2,500.

In some cases, the lender may require a percentage of the sales price, such as 10%, which in the prior example would be $1,500.

Depending on your credit, instamotor offers down payments as low as $500, and as low as $1000 for buyers with no credit.

Should I leave a higher down payment?

You can always invest more than the minimum down-payment required, which has three benefits:

1. Lower monthly payments
2. Reduced cost of the loan itself
3. Possibly a lower interest rate

On instamotor you can check the estimated down payment on every vehicle based upon your credit rating. You can also adjust your down payment amount to figure out how much you can save over the duration of your loan, by putting more down upfront.

Interest Rates

What is an interest rate?

Your interest rate, or APR (annual percentage rate), is the amount you’ll be charged per year for your loan. This is directly related to your credit score, but lenders can also factor in the cost of your car.

How are car loan interest rates calculated?

A good APR is somewhere around 5-8% of the cost of your car, but can be as high as 25% for someone with less than desirable credit.

To be successful in an auto loan it is best to keep your payments at around 10% of your monthly income (if you make $4,500 per month, your monthly payment should be no more than $450). If you would like to finance a car that would raise that percentage above 10%, your interest rates will likely go up as well. You can your interest rates lower by making a larger down payment…if you can afford it.

How can I get a lower interest rate?

If you fall in the high APR category, don't worry! Credit repair and larger down payments are two ways you can reduce your interest rates.

As we mentioned above, a higher down payment can lead to an immediate reduction in your interest rate.. But as la longer term solution =weerecommend finFinancing a car you can afford today, with that higher interest, and making your payments on time can lead to a lower APR in the future.

Once you see what the relationship is between your investment or down-payment, and the lender’s interest rate, you can make a choice that is best for you. Maybe you prefer paying a higher rate for the vehicle you want, or only making the minimum down-payment and keeping your cash for other investments.

The key thing is to make sure you are entering into a loan that works for you, so you can build and improve your credit, in order to lower the cost of borrowing in the future. Auto loans can be a great way to build or repair your credit if you stay within your budget.

Term Length

What is a term length?

Term length is how long you will have to pay off your loan.

What is the average car loan length?

According to Edmunds, the average used car term length is 72 months.

More and more people are opting for a longer loan term, in favor of smaller monthly payments. It is important to understand that a longer-term means more interest. If the amount you can afford to pay monthly is your priority, you will benefit from extended term lengths.

What to know what a car loan would look like for you? Get pre-prequified in 2 minutes.

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What Lenders Consider

Can I get a loan with bad credit or no credit?

When you apply for a loan, lenders consider several factors before accepting or declining your request. They look at your FICO (which may include your Auto FICO), your loan to value ratio (loan amount to value of the car), debt to income ratio (how much debt compared to how much money you make) and how likely you are to pay off your auto loan.

They also look at your payment to income ratio, which dictates what percentage of your monthly income is going to be consumed by your auto loan, which is typically desired to be roughly 15%.

Whether you have good credit, low credit or no credit, you may still obtain an auto loan if you have consistent and verifiable income. If you are self-employed or contracted many lenders use bank verification systems such as Decision Logic or Argyle to verify your income and employment.

Many, if not most banks require a credit score above 700, but many Americans don't meet that limit. Finance companies fill that gap and here at instamotor we specialize in financing for shoppers with low or no credit.

Dealer V. Direct Loans

There are two ways to which you can obtain an auto loan. You can go to a lender yourself, like a bank (preferably one you know), or have the dealer set up the loan for you.

There are pros and cons to each, but basically, going through a dealer can be useful for people with lower credit scores and people who are busy. Working with a dealership will streamline the car buying process. A direct loan, when you obtain the loan yourself, gives you more control of the process but you might need very good credit to get the loan you want.

There are also some pitfalls you should be aware of if you’re in the middle of financing a car.

Rolling over debt

If you get tired of your car during the underwater period, or, the years when the car is worth less than you owe, you have the option of trading in the car and using the remainder of the loan as a down payment towards another new car.

However, this is not recommended as it will pile increase your debt. The best practice is to see the car through to the point where it finally is above ground. Take good care of it until that point, to maximize the amount of money you can get when you sell it.

Avoid (or recover from) Repossession

Repossession is when you’ve defaulted on your loan and the lender comes out and takes your car from you.

Here at instamotor our goal is to set you up for success. We start with a pre-approval, so you can see which cars are in your budget. We provide full transparency on your payments and terms so you can be in the best position to avoid repossession.

If you’re in a tight spot financially speaking, you can call your lender and ask for them to postpone a payment. It is better for the lender if you do not default. If possible, communicate your situation before you start missing payments to show good faith.

If repossession becomes your only option, you may want to consider a voluntary repossession, meaning you work with the lender to return the car. This can save you thousands of dollars in fees, and the experience of an involuntary repossession, which can happen anywhere and at any time.

In today's market you may be able to sell the car before defaulting on your loan and get more than the value of your loan. You can always sell your car to instamotor to help pay off your loan. Recovering from repossession is as simple (not necessarily easy) as building back up your credit.

Pay off your car faster

You are not bound to paying once per month, you may, in fact, pay multiple times per month. Be aware that some lenders won’t charge you for the next month if you exercise this method, so ask them what bi-weekly payments entail. Also directing your payments toward the principal or the part of the original loan that doesn’t include the interest will help pay off the loan faster.

Protect Your Purchase with GAP & an Extended Warranty

It is common for lenders to finance sales tax on the sale, license fees, and protection products, such as an extended warranty and GAP waiver, in addition to the sale price of the vehicle.

Buy what you can afford today, get the dream car next time

You may discover you aren't quite ready for your dream car, but that doesn't mean you can't purchase any car. Don't be discouraged if you have low or no credit. Buying a practical, affordable car at terms you are comfortable with today is a step towards owning the car of your dreams. Stay within your budget, make your payments on time, and work on repairing your credit. As your credit score goes up, so does your eligibility for a car loan with a lower interest rate.

If you are new to credit and don’t have a credit history, or if you have run into a challenge in the past making payments on time and have a credit score below 660, an auto loan is a great way to establish or re-establish your credit, and improve your credit availability and cost in the future. Take the time to consider what you can afford to make sure you can make you new vehicle’s loan payments on time and set yourself up for success. Unexpected expenses can be difficult to manage, which is why lenders provide financing for vehicle protection products that pay for some or all of the expense of a mechanical issue.

Where do you stack up? Check the the average credit scores by state.