Find the right financing for your brand new set of wheels.
Whether your car loan be from a bank, credit union or dealership, find out all you need to know about new car loans.
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How does a new car loan work?
When you apply for a new car loan, you and your car will need to meet the eligibility criteria to be approved. Depending on how strict the lender is, the entire loan amount needs to be spent on the car. Though some lenders may allow extra to cover the costs that come with buying a car. You’re required to make monthly payments until the loan is paid off.
Most new car loans are secured, meaning the lender can repossess the vehicle if you default on your loan. Also, new car loans don’t have to be for brand new cars — the majority of lenders accept a vehicle up to two years old from a dealer or private sale as well.
New car loans comparison
What types of new car loans are available?
- Secured car loan. A secured car loan is a loan where the bank uses the new car as collateral if you default on payments. The interest rate is typically less than what comes with an unsecured loan because there’s less risk for the lender.
- Unsecured car loan. An unsecured loan works a little differently in that the bank or lender doesn’t hold the car as security. If you happen to default on loan payments, the bank will send a debt collector to try and get the money owed. Your assets are safe, but you risk severely damaging your credit score and could go to court.
- Variable rate car loan. Variable rate means that interest rates fluctuate according to the market rate. The variable rate might be cheaper now, but payments can increase if the rates go up — making it difficult to maintain a fixed budget.
- Fixed rate car loan. A fixed rate loan locks in an interest rate throughout the term of the loan giving you certainty that payments won’t change. If market rates are likely to increase in the future, the fixed rate could be cheaper.
- Bad credit car loan. If your credit history has suffered a few black marks and you need a new car, you can consider a bad credit car loan. These loans often come with higher interest rates due to higher risk.
How to compare new car loans
Here are some factors to consider when comparing loans for a new car:
- Interest rate and APR. These two rates pinpoint how competitive a loan is. An APR includes interest and all fees to let you know exactly how much you will have paid at the end of the loan term.
- Other fees and charges. These extra costs could range from loan origination to early termination fees. The lender should be transparent about any fees before the agreement is finalized — always read the terms and conditions.
- Extra payments. It varies by lender, but you may be able to repay your loan earlier without paying any fees. Be sure your loan doesn’t come with any fees for early repayment that could change the overall cost of the loan.
- Eligibility. Before applying for a new car loan, make sure you’re eligible and that your car meets the lender’s criteria.
- Loan amount. You should also check the minimum and maximum loan amounts to ensure the loan is right for your needs.
Pros and cons of a new car loan
- Lets you purchase a new car without paying for it all at once
- New cars are generally easier to finance
- Can help build credit if the loan is maintained properly
- Interest rates are generally lower on new car loans
- Promotional 0% rates may apply if your credit score is high
- New cars can depreciate in value quickly
- It’s another payment to manage in your monthly budget
- If your loan isn’t large enough, you’ll need to front the rest of the cost
3 questions to ask before you get a new car loan
- What’s the final cost? It’s essential that all the costs associated with the car loan are established with the loan provider. The obvious costs are the interest rates, but there are other costs too — these may vary depending on the lender.
- What type of loan makes sense? Fixed interest rates are common with car loan companies and won’t change throughout the loan period. It’s more uncertain choosing a variable interest rate, as the loan provider could adjust the interest rate at any time depending on the market.
- Can you pay the loan in full early? Early payment fees should be negotiated with the loan provider just in case the borrower’s situation changes throughout the loan period.