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Learn more about car loans

If you’re unfamiliar with car loans, check out some helpful links below. Otherwise, feel free to reach out to our consumer lending team with any questions!

• What are car loans?
• What is the different between a secured and unsecured car loan?
• How do car loans work?
• Should you buy or lease?
• Where can you get car loans?
• How can I afford a car loan?
• Refinancing your car loan
• Contact us

What are car loans?

A car loan is often a secured loan that is used to purchase your desired vehicle. The vehicle serves as collateral for the loan. If you default on your repayments, the lender can seize, or repossess, your automobile. Car loans are often repaid in installments. The lender retains ownership over your vehicle until you completely repay the car loan, similar to a mortgage.

What is the difference between a secured and unsecured car loan?

Car loans can be offered as a secured and unsecured loan. As mentioned previously, a secured loan requires the borrower to put up collateral until the loan is paid in full. If you fail to make your payments, then the lender can repossess your vehicle. Secured loans tend to have lower interest rates, higher borrowing limits and longer repayment options (or terms).

Unsecured car loans require no collateral as it’s simply a line of credit. The rate issued to you is based on your credit score. If you fail to make your payments, your debt is sold to a collection agency since there’s no collateral for the lender to seize. These tend to have higher interest rates because they pose more risk to the lender. Unsecured loans may also be called personal loans.

How do car loans work?

When you are approved for a loan, you receive your money in a lump sum which is determined by your credit score and other factors through the application process. Then you’ll pay it back over time. The length often depends on what terms are available and which one fits your budget. The amount you borrow, the time you take to repay the loan, and your interest rate all determine your monthly payment.

• Loan amount. The loan amount, also known as the principal, can be the total cost of the car or can be less. The loan amount depends if you’re making a down payment or trading in your old vehicle.
• Annual percentage rate (APR). Your APR is your effective interest rate you pay on your loan. Think of it as your interest rate stated as a yearly rate. The APR can include fees that you’ll pay for, such as origination fees.
• Loan term. This is the amount of time you have to pay back your loan. Terms can range from 36 to 72 months.

Should you buy or lease?

Ultimately, it comes down to your financial goals and priorities. You should be asking yourself these questions:

• Do I have good credit? If you answered no to this, you should consider buying a car. Leasing often requires a high credit score. Granted, you’ll likely have a higher interest rate, but you can usually get a car loan.
• Will I be driving a lot of miles? If you answered no to this, you should consider leasing a car. Leases will have a limited number of miles you can drive in that car. If you exceed that limit, you’ll have to pay a fee that you agreed upon. However, if you don’t drive often this won’t be a problem.
• Do I want to be driving the latest car models? If you answered yes to this, you should consider leasing your car so you can enjoy a new car every few years.
• Do I have a tight budget? If you answered no to this, consider buying a car since your budget can accommodate your monthly car payments. Lease monthly payments are usually lower.

Refinancing your car loan

Market rates can fluctuate and over time you may find yourself with more money in your budget. Refinancing your current car loan with new rates or a shorter term can save you money each year, just like refinancing a mortgage can.

The primary purpose of refinancing a car loan is decreasing the overall cost of the loan as well as lowering your monthly payment. If you’re trying to determine if refinancing is the right option for you, ask yourself these questions:

• Are interest rates lower or higher when I bought my car? If they’re lower, it’s not a bad choice to refinance your vehicle.
• Has your credit score improved since you bought your car? If it’s improved, you’re likely to benefit from lower interest rates which means saved money over the remainder of your loan.
• Has your income dropped since you bought the vehicle? If you’ve maintained the same income or received a raise, you can afford a different monthly payment to pay down your loan.

When you refinance your car loan, you have two options: traditional refinancing or cash back refinancing.

When it comes to traditional refinancing, your lender will completely pay off your old loan and provide a new loan with new terms. Just like your old loan, it’ll be at a fixed interest rate and fixed term.

Cash bank refinancing works similarly to traditional refinancing, but you’ll borrow against the equity in your vehicle. If your car has a higher appraised value but your loan is much lower, you have equity in your vehicle. For example, you have $10,000 car loan but your car appraises at $15,000, you have $5,000 in equity in your car. You’ll then receive a check for the amount of equity you wish to borrow against your vehicle. The amount you borrow is added to your new loan and you receive a new interest rate and term.

Ultimately, you should contact your bank and ask if refinancing is right for you.