Understanding Auto Loan Options: What You Need to Know

Understanding Auto Loan Options: What You Need to Know

Let us drop some vocabulary on you. Though auto and recreational loans are accompanied by a variety of terms you’ve probably heard before if you’ve ever taken out a personal loan or a mortgage, there are some definitions you should keep in mind.

The following are some common words you may hear when shopping for an auto loan—and what they truly mean.

Direct vs. indirect financing

When you hear the terms “direct” or “indirect” when it comes to your auto loan, it’s referring to the avenue through which you’re securing your funds. When you finance directly, you’re gaining a prequalification from a financial institution, such as Sioux Falls Federal Credit Union (SFFCU), prior to heading to the lot. When you finance indirectly, you’re having your loan originated by the dealership, which assigns you a financial institution.

So what are the pros and cons of each option? Well, a direct auto loan offers you the ability to know your car-buying budget before you hit the lot. You can comfortably select the vehicle that you know you can afford to finance—no question marks when you start test-driving and head to the closing table. An indirect loan offers the convenience of a one-stop shop—you can handle securing your financing the same day that you select your vehicle. (You just have a little less knowledge of your budget going into the transaction than you would with a direct loan.)

Loans vs. leases

While there are values to both, depending on how you intend to use the vehicle and for how long, auto buyers will have to make the determination themselves whether to own or to lease. Similarly to selecting between a fixed-rate or an adjustable-rate mortgage, loans are for long-term buyers who plan on owning the car outright for the life of the vehicle. Leases are generally best for just those interested in upgrading to a new vehicle in the short-term and on a regular basis.

As for the benefits of each, a loan offers you the ability to own equity in the vehicle as you pay back the balance—this can make for some handy downpayment funds whenever you decide to trade up for a newer vehicle. And since leases can sometimes come with additional restrictions on mileage or wear and tear, loans can be handy in that respect—no additional fees, since you own the car outright.

Leases can be desirable, though, for their lower monthly payments and the ability they offer to easily upgrade to the newest model, if that’s something that’s important to your car-buying needs.

You can also achieve some of the best of both worlds without having to choose one over the other—SFFCU’s DrivingSense loan takes a little from both columns and brings the most positive benefits of both a loan and a lease to the financing package. Click to learn more.

Used vs. new

Auto loans can also vary depending on whether you’re purchasing a new or used vehicle. Depending on the lender, the manufacturer of the vehicle in question and other rebate and promotional options, a new car loan will typically come with a more competitive interest rate than a used one.

Generally speaking, a new vehicle will come with less mileage and less wear and tear—thus less likely to need frequent tune-ups in the near-term. But, as they say, a new car depreciates significantly in value once it exits the lot, so a used vehicle can be more budgetarily feasible in this regard.

Talk to your lender at SFFCU about your options—and take advantage of the competitive rates that come with a community credit union.

Car-Buyer's How-To Downloadable Guide