Buying a new car is one of the many milestones in life, however, the process may be overwhelming for most. Apart from watching the car’s price tag, there are various other decisions that you may need to make, such as trade-in value, auto financing, warranties, and add-ons.
Credit unions are one of the best places to finance your dream car. This financial institution offers the lowest rates compared to banks and other lenders. The logic behind auto loans provided by credit unions or any other bank is straightforward. When they provide you with a loan, they take a bet on whether you will pay that money back or not. If the odds remain in your favor, they will accept a lower interest rate on the loan, but if they believe that you won’t pay back the loan, they may charge you a higher rate as compensation for taking this risk. Perceived risk is not the only thing impacting your credit union auto loan payments. Many other factors are taken into consideration. Listed below are a few of these:
Credit Score
A credit score refers to the numeric indication of your creditworthiness to check your financial responsibility and reliability. Banks often check your credit score while approving different loans, such as auto loans, personal loans, and home loans. Having a good credit score also prepares you for negotiation.
LTV Ratio
An LTV ratio or loan-to-value ratio refers to the amount you are borrowing divided by the value of the car you are purchasing. The lower the ratio, the lesser risk the lender will accept. If your LTV is exceptionally high, you may have to consider offering a heftier down payment. It’s done to reduce the rate the lender charges you when you opt for an auto loan.
Debt-to-Income Ratio
Apart from your loan-to-value ratio, your debt-to-income ratio also influences your credit union auto loan. This ratio is a simplified way that any lender uses to measure your ability to repay them. If your debts are outstanding, it may risk your perception as a reliable borrower to the lender.
Down Payment
Your willingness to place a substantial down payment may have positive effects on your credit union auto loan payments. Most down payments remain small when compared to overall purchases. The more money you put down, the more equity you will have in the vehicle. It will also give you more opportunities to negotiate a better interest rate while seeking an auto loan from a credit union.
Length of Term
Length of the term of loan also has a role to play. For instance, if the length of the term is short, the lender will expect to receive their money quicker. Thus, they will offer you a better interest rate for the loan. Extended terms with lower payments may appear attractive at first sight, but it only prompts you to pay more money.
Dealership Profit Models
Both banks and credit unions entertain more reliable lending power than dealerships. Their business model is to profit on the margin between the rate they are paying to borrow the money and the rate they charge all their customers to use it. The rates charged by the dealerships may fluctuate based on the rates they pay and the amount of capital available on the credit markets.
Takeaway
The next time you think about purchasing a car, make sure to check all the above-listed factors that constitute your financial health. Eventually, you will save a considerable amount on a credit union auto loan.
