Qualities to Look for in the "Best" Car Loans

The best car loans will offer a great rates and low closing costs. A good car loan will have favorable loan terms, low rate and low closing costs. It’s important to get a few quotes before deciding on a loan.

Favorable Loan Terms

Loan terms are a broad category meant to describe how the loan is structured. Within these terms, there are areas where you can look to gain a more favorable loan.

  • Collateral - You will likely be securing the loan against your car title. If you default, the lender will seize your car. Protect yourself from risk by understanding when and how your lender can seize your vehicle. Assure you have time to rectify any missed payment. Also assure your lender has to notify you prior to seizing your automobile. 
  • Loan length - The longer your loan, the more expensive it will be. On the other hand, the shorter your loan, the higher the monthly payments. You should aim for a loan length that leaves you with affordable payments and still leads to ownership in the minimum amount of time. Typically, 5 year loans are average length.
  • Modification terms - Perhaps the most important loan term to check up on is the fee for modifying or prepaying your loan. If you seek to refinance, settle or pay off your loan prior to its maturity date, how much will you owe? Keep these fees as low as possible, because many people pay off car loans early.

Low Financing Costs

You will have to compromise between terms and costs. If you want only favorable terms as discussed above, your lender will charge you far more. Seeking a balance between low costs and good terms is important.

  • Interest rate - Your annual percentage rate (APR) should be as low as possible. More than any other factor, your interest rate will determine the financial strength of your loan. You should aim for a fixed rate loan. Adjustable rates will leave you at the will of your lender in the future.
  • Down payment - You can use your down payment as leverage for lower costs elsewhere in your loan. A larger down payment will make your loan sum lower, and it will reduce your interest rate in most cases. Many borrowers will use their vehicle trade-in as a down payment. When doing this, research the value of your trade in independently. Your dealer will attempt to purchase the car for its lowest possible value. Knowing what the car is worth on the market will help you get a good price.
  • Financing fees - You will be charged a fee if you are late on a loan payment. You may also be charged a fee for "loan origination," which is the process of funding your loan. Try to keep both of these fees as low as possible in order to get a better deal on your financing.
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