If you’re car shopping for you or a loved one, finding and financing the right vehicle could mean safer travel, better commutes, happier road trips, and so much more. Yet, finding the right vehicle can be stressful, especially as prices continue to increase.

As of December 2021, new car prices were averaging just over $47,000, according to Kelley Blue Book. And as of early 2022, even used cars were seeing high prices, with the average one- to five-year-old car selling for an average of around $34,400, according to research by iSeeCars.com. With these numbers in mind, even those shopping for a more affordable automobile may want or need an auto loan to finance the purchase.

At Indiana Members Credit Union (IMCU), we understand that loans can be an overwhelming process. We’ve put together this auto loan guide to help you understand the process and what to watch for when you finance your next vehicle. 

What Is an Auto Loan? 

Put simply, an auto loan provides the financing to help you purchase a new or used automobile. With an auto loan, you borrow money from a lender to pay for a vehicle up front. In return, you agree to pay that money back, plus interest and fees, over a set period of time.

Auto loans, sometimes referred to as car loans, are typically used to purchase a vehicle such as a car, truck, or SUV. However, many financial institutions, including IMCU, offer loans for other types of vehicles as well. For example, you may apply for an adventure loan (for boats, motorhomes, or travel trailers) or a motorcycle loan, along with traditional auto loans.

Auto Loan Terms to Know

Before moving into the details of auto loans, it is important to establish a baseline meaning for several commonly used terms when discussing loans. Having an understanding of these key terms can make a big difference when it comes time to find and apply for a car loan.

• Lender: The lender is the financial institution that issues the loan. Typical lenders for auto loans include credit unions, banks, and indirect lending through dealerships. Which company is best for a car loan? The fact is, different lenders offer different services, APRs, and loan terms, so it is important to understand the costs and benefits of each option. For instance, dealerships offer convenience, but at a higher price.
• Interest Rate: The interest rate reflects only the percent of money you’ll pay each year in interest. Because the interest rate does not include fees, comparing APR rates is more informative than comparing interest rates alone.  IMCU does not charge an auto loan fee, so the interest and the APR rates are the same.
• APR: Typically presented as an acronym, APR stands for annual percentage rate. APR refers to the total percentage you’ll pay to borrow money each year, including interest and any fees your lender assesses. The higher the APR, the more money you’ll pay in total. To find APRs, simply look for a lender’s auto loan rates. It is important to note that new car loan rates may differ from used car loan rates. Factors like your loan term and credit score may impact your APR as well. To find IMCU’s market leading auto rates, visit IMCU.com.
• Loan Term: Also referred to as loan length or loan duration, a loan term is the amount of time you will have to repay your loan. Loan terms are typically in 12-month increments, generally ranging from 36 months (or three years) to 84 months (or seven years). The longer the loan term, the more interest you will pay over the duration of the loan.
• Monthly Payment: Monthly payments are the amount of money you will pay each month toward your loan. Your monthly payments will go toward both principal and interest. 
• Principal: For a loan, the principal is the amount of money you borrow, not including any interest or fees.
• Amortization: Amortization refers to the process of paying off your loan wherein a portion of your monthly payment goes toward principal and a portion goes toward interest. With most loans, your early monthly payments will send more money toward interest, while payments further down the line will send more money toward principal.
• Down Payment: When purchasing an automobile, you may want or need to provide a down payment. A down payment is simply the money you put down (or pay up front) toward the cost of your car. Down payments could be from your savings, or you may apply any money you receive from a vehicle trade-in toward a down payment. Down payments can lower your loan amount, which may mean lower monthly payments or the ability to pay off your vehicle more quickly.
• Total Cost: When you finance a vehicle, it is important to understand the total cost of your vehicle. This number will represent the principal amount plus the total amount of interest, fees, and taxes you will pay based on the terms of the loan. The total cost may also represent the total vehicle cost, which would include any funds put toward a down payment as well.

What Car Can I Afford Based on Salary?

Car shopping can be an exciting time, but it can also be overwhelming and stressful. One of the most important factors when it comes to choosing a vehicle is how much you can afford. This is not cut and dry, however. Every individual’s financial situation is different, so what works for others may not work for you. Consider the following questions when determining how much you can afford to spend on a vehicle.

• What Is Your Take Home Pay: One of the first things to consider when determining how much of a loan you can afford is your take-home pay. While some financial experts say you should spend no more than 10 to 15% of your monthly income on a car payment, others say 20 to 30% is doable.
• What Are Your Other Financial Obligations: Of course, that number may change depending upon how many other bills you pay each month. Consider all of your monthly expenses, including your rent or mortgage payment, student loans, utilities, cell phone bills, insurance, and more when determining your budget. When considering a long-term purchase like a vehicle, it is also important to consider future costly expenses like a wedding or the birth of a child.
• What Is a Good Monthly Car Payment for You: When determining how much you can afford to spend on a car, it is important to remember to be realistic and find a number you are comfortable with. How much do you want to spend each month on your car payment? How long do you want to be making car payments? While some individuals may be willing to have larger payments or longer loan terms, others may be looking to spend less over a shorter period of time.

For example, you might be wondering, “How much should I spend on a car if I make $60,000 per year?” That equals out to $5,000 per month in gross pay and roughly $3,685 in take-home pay. Assuming you want to stick with a monthly payment of 10-15% of your take-home pay, you might be looking for a monthly payment between $368.5 and $552.75. Once you’ve done those basic calculations, you can begin to compare it to your budget and any expectations you have in place. 

As you’re doing the math, consider how much you’ll be paying in interest over time. If you can afford a higher monthly payment, you will end up paying significantly less in interest over the duration of your loan.

What Credit Union Auto Loan Calculator Tools Are Available?

Fortunately, you don’t have to decide all of this on your own! IMCU offers several tools to help you calculate how much of a loan you can afford, how long it’ll take you to pay off a loan, and how much your loan payments will be.

• Auto Loan Calculator: IMCU’s Alternative Payment Frequencies tool allows you to enter information such as your loan amount, interest rate, number of payments, and payment frequencies to determine principal balances by payment, the total of all payments made, and the total interest paid. This can be especially useful when deciding between different lenders, payment structures, or loan terms.
• Car Payment Calculator: IMCU’s Amortizing Loan Calculator allows you to enter information such as your loan amount, interest rate, and loan term in months to determine how much your monthly payment will be. Alternatively, enter a desired monthly payment, interest rate, and loan term in months to calculate how much of a loan you can afford.
• Loan Term Calculator: IMCU’s Existing Loan Calculator allows you to examine your current loan by calculating your remaining loan balance based on the number of payments you have left to make. For those considering refinancing their loan, this tool may be of particular interest. Later in this article, we will discuss more about the refinancing of auto loans.

How Do Auto Loans Work?

When you take out any type of loan, it is essential to understand what exactly you are agreeing to. Here is a general guide to the process of researching, finding, applying, and finalizing an auto loan.

Step 1: Set a Budget

Before doing anything else, you must determine how much you can realistically afford to spend. Do you have any money you can use for a down payment? What is a good loan amount for a car that fits your ideal monthly payment? How long of a loan would you prefer? Remember, shorter terms mean higher monthly payments but less overall interest. Longer terms will grant you lower monthly payments but you’ll end up paying more in the end. Use the questions and tools provided earlier in this article to determine a budget that works for you.

Step 2: Research Auto Loan Companies

It is important to secure a loan with the best rates and terms. Once you have an understanding of your budget, begin to look at lenders, their loan terms, their fees, and their APRs. Where do you start? With IMCU! IMCU is one of the best credit unions for car loans with the lowest auto loan rates around.

As a credit union, we hear a lot of questions like, “Is it better to get a loan through a credit union than through a bank or the dealer?” The short answer is, yes. Because credit unions are member-driven, not-for-profit institutions, most credit unions auto loan rates are quite competitive—generally offering lower rates and fees than bigger, for-profit financial institutions. That’s exactly why we think going with a credit union like IMCU is the best choice.

Additionally, the best credit unions for car loans also offer special perks for members, like assistance finding a vehicle or partnerships with local businesses. At IMCU, for example, our Auto Advisor Program can take the stress out of the car buying process by assisting with finding the right vehicle and referring you to a trusted dealer.

You will need to become a member in order to qualify for a loan at a credit union. However, at IMCU that process is simple! You simply need to live or work in one of the counties in Indiana where we operate. A loan officer can assist you with this as part of the preapproval process. Find the location nearest to you to get started today.

Step 3: Apply for Pre-Approval and Understand Your Credit Score

Wondering, “Should I get pre-approved before looking for a car?” While not required, it’s highly recommended to get pre-approved before car shopping. A pre-approval is simply a lender’s way of saying that they would lend to you given certain criteria. A pre-approval allows you to make a cash buy at the dealership, eliminating the stress of the financing discussion at the dealership. 

Not only that, but pre-approvals help solidify your budget as you shop (pre-approvals will provide a maximum amount you can finance), and it’ll also provide your credit score.  A credit score is a number on a scale from 300 to 850 that provides lenders with valuable information on how likely you are to be able to repay a loan. There are three main credit bureaus: Equifax, Experian, and TransUnion. What credit score do credit unions use for auto loans? This varies from lender to lender, and IMCU currently uses TransUnion.

What is the lowest credit score to buy a car? There is no universally accepted minimum credit score for a car loan. In general, however, higher credit scores will allow you to secure a loan with better interest rates. Those with low credit scores may be able to use a cosigner to secure a loan or a lower rate as well. Individuals with questions about their credit score and how it may impact their ability to receive an auto loan from IMCU are encouraged to contact their local branch to speak with a loan officer.

When seeking a pre-approval, you’ll fill out a standard loan application. Credit union car loan requirements include your personal information, your employment status and income information, and your credit score. You may also be asked basic information about where you plan to purchase your vehicle from (a dealership versus a private seller, for example) and what type of auto insurance you have.

It’s important to remember that pre-approvals do not offer a guarantee. Pre-approvals are generally good for a 30- or 60-day window, so only seek pre-approval once you’re ready to start the car shopping process in earnest. Ready to apply for pre-approval with IMCU? Simply complete our loan application online, call, or visit a branch.

Step 4: Find Your Car

Now comes the fun part of actually finding your future vehicle. Search online and head out to dealerships to test drive vehicles and find the right fit. Not sure where to start? With IMCU’s Auto Advisor Program, you can search, shop, and finance all in one convenient hub. Search for vehicles sold by our dealer partners today.

And don’t forget to request a complimentary CARFAX Vehicle History Report™ once you’re ready to buy. IMCU wants you to find the best vehicle. That’s why we provide a CARFAX Vehicle History Report™ to help protect our members from salvage, total loss, structural damage, lemon, and flood vehicles. Your branch representative will be happy to share a CARFAX Vehicle History Report™ with you.

Step 5: Finalize Your Loan

Once you’ve selected a vehicle, it is time to finalize the loan process. While reviewing your loan contract, keep an eye out for the following key pieces of information.

• Buyer’s Order: The dealership provides the Buyer’s Order.  Ensure all the information about you and the vehicle you are purchasing is correct. Double check the vehicle identification number (VIN) and the spelling of your name.  Make sure there are no unexpected dealer fees or add-ons in the agreement!
• Fees: While IMCU does not charge financing fees, dealerships and most lenders will. It is important to understand if there are fees present and what they are.
• Add-Ons: You will have options for payment protection coverage, extended warranties, or other dealership add-ons when making the purchase. Ensure your loan only includes the add-ons you want and need. Before going with dealership add-ons, check in with your lender. For example, IMCU offers an array of similar products, normally at a significant savings.
• Numbers, Rates, and Terms: Before signing the loan, ensure that the numbers match what you were offered in your pre-approval.
• Other Clauses: Be mindful of clauses that may limit or penalize you for refinancing or paying your loan off early.

If anything looks amiss, flag it and discuss it with your lender. Otherwise, simply sign and finalize your loan. 

Step 6: Make Your Payments

Once your loan has been finalized and you’ve driven off with your new vehicle, look into the process of submitting your monthly payments. An auto-pay option can be an easy way to ensure you’re paying on time each month. Also, be sure to understand when your first payment is due. At IMCU, for example, our loans offer up to 90 days until your first payment is due.

When Should You Refinance a Car Loan?

If you have an existing auto loan, you may be interested in refinancing it, or wondering if you should even consider it at all. Here are some times when it makes sense—and doesn’t make sense—to refinance.

When to Refinance

• Your Credit Score Has Improved: Typically, the higher your credit score the better the APR you qualify for. If your credit score has improved since your loan originated, you may be able to refinance your loan for a lower APR. Doing so may mean you’ll pay less interest over the remaining months of your loan.
• You Want to Lengthen or Shorten the Loan Term: Looking for lower monthly payments by extending the term of your loan? Or, would you like to make larger monthly payments to pay off your loan faster? In either case, refinancing your loan may be the solution. For those looking for lower payments, do remember that the longer it takes to repay your loan the more interest you will pay.
• Interest Rates Have Dropped: If the U.S. auto loan rates have dropped since you finalized your loan, you may be able to refinance to qualify for a lower interest rate. Even a small decrease in the interest rate can save you money over the remainder of your loan.
• You’re Having Difficulties with Your Existing Lender: Sometimes, you simply wish to change your lender. Perhaps you’re dealing with frustrating customer service experiences, for example. Refinancing with a new lender like IMCU may alleviate some—or all—of these issues.

When Not to Refinance

• Your Loan Has Prepayment Penalties: Some loan providers charge a prepayment penalty for paying off your loan early. If your loan has prepayment penalties, you should calculate how much the penalties will be and whether or not it is in your financial best interest to refinance. 

We commonly hear the question, “Does refinancing a car hurt your credit score?” Just like with an auto loan, it may cause a small dip in your credit score, first when the potential new lender runs a hard inquiry and again if you accept the offer to refinance. However, these temporary dips in your credit score should resolve within a few months, once you’ve built up a history of on-time payments.

Indiana Members Credit Union: A Great Rate for the Road Ahead

At IMCU, we’re here to serve you. As a credit union, we strive to provide a full range of low-cost financial products and services, convenient locations throughout Indiana, and outstanding member service. 

Whether you are looking for a new or used vehicle and need a loan or you are considering lowering your current vehicle loan with a refinance, IMCU has flexible options to get you to your end-goal. With various loan options, expert auto loan officers, and our Auto Advisor Program, IMCU provides you with all the resources you need to secure financing and find the right vehicle for you.

Ready to start exploring your options? See our current auto loan rates and contact us if you have any questions.