Borrow money to buy a car – or use your car to borrow money for something else?

The term car loan can refer to two different types of loans:

  • A loan where you borrow money to buy a car. Some lenders will require a lien against the car as collateral for the loan, but there are also lenders that offers unsecured loans to borrowers they deem sufficiently credit-worthy.
  • If you already own a car outright, you can use it as collateral for a loan when you need money for something, e.g. to pay a sudden unforeseen medical bill. In the United States, this type of loan is often referred to as a cat title loan, auto title loan or pink slip loan. In the United Kingdom, the term logbook loan is common.What ever we elect to call it, this type of loan tend to be short-term and high-interest. It is often marketed to individuals who have a hard time obtaining better forms of short-term loans, e.g. due to irregular/undocumented income or a history of not adhering to repayment plans.

Borrowing money to buy a car

Many car dealers work with lenders willing to provide car buyers with financing where the purchased car is used as collateral for the loan. One advantage with going with the lenders recommended buy the dealer is that it is very convenient. Usually, you don’t have to visit the lender’s place of business – everything is taken care of right at the car dealer ship. The process is quick and easy, and you can drive out of there in your new car in no time.

Sometimes the car loan promoted by the dealership is actually a very good deal, but there are also situation where you would have been better off borrowing money from an independent third party lender instead. It is therefore always a good idea to explore your options before you make any commitment. By learning more about available offers from third-party lenders, you will also be more free when it comes to selecting from whom you wish to buy your car.

Some third-party lenders will require a lien against your car as collateral, while others extend unsecured car loans – provided that you credit-worthiness is sufficient. With an unsecured car loan, you have a greater flexibility in some ways, since the lender doesn’t care about which car you buy, what condition it is in, warranties, how you elect to keep it insured, and so on. You can for instance buy a fixer upper in poor condition, or buy directly from an individual (as opposed to a car dealership) without meeting with any resistance from the lender. Both banks and credit unions are known to offer unsecured loans.

Pre-qualifying for a car loan

With some lenders, you can pre-qualify for a loan. This means that you know beforehand how much the lender is willing to lend you, based on your credit-worthiness. Being pre-qualified for a loan when looking for a car can make it easier to act quickly when you find a good deal. The pre-qualification will also let you know what the upper limit is and you don’t have to waste time looking at cars that are beyond your reach.

Compare car loans

Here are a few things that are good to keep in mind when you compare car loans.

Total cost of the loan

Always check the total cost instead of just looking at nominal interest rate. Even with a low nominal interest, a car loan can cost you a lot of money if you pay it off very slowly, if there are a lot of tack-on fees, and so on.

Be especially on your toes when it comes to checking for application fees, administration fees, approval fees, and monthly fees for sending out the bill.

Also make sure what will happen if you are late with a monthly payment. What is the late fee? If the lender sends you a reminder, will there be a reminder fee?

Loan size

Will you be able to borrow enough money to cover 100% of the purchase price, or only a part of the purchase price?

Will you be able to borrow money to finance additional costs connected to the car purchase, e.g. an inspection, administrative fees, etc?

Loan term

How quickly will you be required to repay the car loan? Is this a good pace for you and your household budget?

If you pay off the principal quicker than planned, will you still be required to pay the interest that the lender had planned to make from the loan?

Are there any grace periods?

With some car loans, you will have access to a grace period that you can utilize to get you through an especially tough month. When you invoke the grace period, it means that you don’t have to make any payment on the car loan that month. After that month, you continue making payments as normally. Using the grace period means that it will take a little longer than predicted for you to pay off the loan, but it can be a good way of getting through a month where a sudden and unforeseen expense is wrecking havoc with the household budget and you don’t want to clean out your savings account completely to stay on top of all the bills.

About cash backs

A cash back is a rebate that auto manufacturers provide to entice you to buy their cars. The manufacturer authorizes the dealership to advertise a rebate on particular models. When you buy the vehicle, you get the rebate in the form of cash.

Getting cash in hand always feels nice, but don’t let it trick you into accepting a bad deal. Always take a look at the whole situation and make a comprehensive evaluation.