Credit Unions Good for Auto Loans

Less than one in five used car loans are made from credit unions, which is surprising because they can be a great source of low-cost loans because they can offer competitive financing rates to their members versus other institutions.

What’s a Credit Union?

Credit unions are financial institutions formed by a group of people with a common bond (like a church, business or union). Credit union members pool their assets to provide loans and other financial services to each other.
These factors allow credit unions to pay dividends to their members (not shareholders) and offer them lower loan rates, higher savings rates and fewer service fees.

Who Can Join a Credit Union?

There are various types of credit unions. Some are affiliated with professional groups, others are part of companies, and some credit unions have geographical requirements for membership. So, basically you can join some depending on where you live.
Typically, credit unions are smaller organizations, which means you’re also going to get faster service. Decisions are almost always made locally. Your loan check is going to be cut right there so you avoid overnight delivery fees. Other processing fees are typically lower, too.

Possible Savings

According to CUDL, the country's leader in indirect and point-of-sale lending for the credit union industry, credit unions accounted for 16.9 percent of all auto loans originating in 2007, down slightly from 18 percent in 2006. The average used-vehicle loan amount was $18,199 in 2007, a $45 increase from 2006.
The advantage to credit unions is they are owned by their members and are not-for-profit. Terms are usually better with lower interest rates. That means your loan is going to be shorter. CUDL reports that used-vehicle loans, meanwhile, decreased in average maturity from 70 months to 65 months in 2007.

Get Shorter Loans

It makes me shudder that used car loans are more than five years. It’s an indication that people are buying used cars they can’t afford – and paying more. For example, if you borrowed $16,000 for 48 months at 7.7 percent, your monthly payment would be $388.36 and your total payments would be $18,641.16. With a 60-month loan, your monthly payment is going to be lower at $322.13 but your total payment is going to $19,327.80. That means saving $60 a month short-term is going to almost $700 more in the long-term.

Find a Credit Union

The Credit Union National Association (CUNA) maintains a website that can help you find a credit union near you. It also has some good financial tools that could be helpful when making decisions about your loan.

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How to Get a Bad Auto Loan

Getting an auto loan is a confusing and intimidating process. To get the best auto loan, you need to avoid mistakes. This page covers some of the easiest and most costly mistakes that you should avoid when shopping for an auto loan.

1. Focus on the Monthly Payment

It’s good to know your monthly budget. It’s a bad idea to shop for your auto loan based on the monthly payment alone. There are several ingredients to a loan, and all can be manipulated to make the monthly payment appear low. Meanwhile, you’re still getting a bum deal. Negotiate the purchase price first, then figure out the financing later.

2. Stretch Out the Payments

Along the lines of 1, a longer auto loan term can keep monthly payments low. However, you’ll pay more in interest over time. It also takes longer to eliminate the auto loan, which could last longer than your affection for the car. Sometimes you end up owing more on the car than it’s worth if you go for long loan terms (called “upside-down” auto loans). Keep the term to 5 years or less.

• See the nuts and bolts of a loan with a Loan Amortization Calculator
• How Auto Loans Get Upside Down

3. Avoid Shopping Around

You can get your auto loan from a number of places. Don’t just take what the dealer offers, although the dealer may have a competitive deal. Check with local credit unions for auto loan deals, ask your banker, and see if peer to peer lending is a good choice. You can save thousands in interest costs by getting your auto loan from the best place.

• How Credit Unions Work
• Peer to Peer Lending Overview

4. Ignore Your Credit

Your credit will affect your ability to lease a car or get an auto loan. If it’s bad enough, you’ll get turned away. If it’s just OK, you’ll probably pay more than you have to. If you’ve got excellent credit, you will have more options available and you’ll pay less in interest. Make sure you keep your credit in good shape.

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Before You Get an Auto Loan

It’s always a delight to get the keys to a new car. For most, the only challenge is paying for the car. Unless you have cash in hand, you’ll need some type of auto loan. Follow these six keys to a great auto loan and you can ride around knowing you got the best deal.

Key to a Great Auto Loan 1: Manage Your Credit

One of the first things you should do before applying for an auto loan is review your credit. All US consumers are entitled to a free credit report, so use this resource. Find out if there’s anything you need to fix. Any errors or bad habits could affect your auto loan rate.

• What is Credit?
• How Credit Scores Work

Key to a Great Auto Loan 2: Know How Much You Can Spend

Diligent budgeters already know this, but I don’t run into very many diligent budgeters. Track your budget any way you like (Microsoft Money is a good tool or build your own system), and then find out how much your payments might be with the car payment calculator.

Key to a Great Auto Loan 3: Look at the Big Picture

The terms of your auto loan will determine how much you pay now and how much the auto loan costs overall. Remember that a low cost now may not mean low total costs for you in the big picture. For example, most borrowers choose a low down payment because it’s easy to manage today. However, that choice increases the total cost of your auto loan and usually leaves you ‘upside-down’ (meaning you owe more on the vehicle than it’s worth) for years to come.

• Beware Upside Down Loans

Key to a Great Auto Loan 4: Consider Insurance

When you ask various lenders what they’ll offer you, you may find that you need insurance to get the best auto loans. I’m referring to disability insurance and life insurance at this point. The lender is concerned that something could happen to you and you wouldn’t be able to pay them back. Having insurance might not be a requirement, however you should know all the details if you already are insured.

Key to a Great Auto Loan 5: Shop Around

This is simple but it is often overlooked. The most important point here is that you don’t have to get your auto loan from the dealership. Check with a credit union, bank, online lender, or P2P lending source. In most cases your car dealer won’t have the best auto loan. By consulting with an alternate lender before stepping onto the lot, you’ll be armed with knowledge of what’s fair -- and you may have some bargaining power.

• Peer to Peer Lending Overview

Key to a Great Auto Loan 6: Avoid Prepayment Penalties

Things change in life and flexibility is important. Your auto loan should also be flexible. Find a lender that will allow you to make extra payments or pay off the loan entirely without any penalties. It’s important to read the fine print – some penalties aren’t called “penalties”.

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Recourse Loans and Non-recourse Loans

Recourse loans are loans that allow the lender to come after you in case you default. You can contrast recourse loans with non-recourse loans, which create more risk for lenders. Let's take a look at recourse loans, how they work, and how to identify them.

Recourse Loans - The Recourse

Recourse loans get their name from the fact that lenders have power. They are allowed to go after you for amounts that you owe - even after they’ve taken collateral. If you default on a recourse loan, the lender can bring legal cases against you, garnish your wages, and try to collect the amount you owe.
A legal action to collect money after foreclosure is generally called a deficiency judgment.

• How Deficiency Judgments Work
• How Collateral Works

Non-Recourse Loans

A non-recourse loan does not allow the lender to pursue anything other than collateral. For example, if you default on your non-recourse home loan, the bank can only foreclose on the home. They generally cannot take further legal actions against you. The bank is out of luck even if the sale proceeds do not repay the loan.
Non-recourse loans create the most risk for lenders. Because they can only collect the collateral - and nothing else, they want to see lower loan to value ratios to reduce their risk. These loans may have higher interest rates than recourse loans.

Identifying Loan Types

You should consult your attorney or tax adviser be certain whether you have a recourse loan or a non-recourse loan. However, you can use the information below for discussion.
State laws often dictate whether a loan is a recourse loan or not. California is best known as a non-recourse loan state that makes it hard for lenders to sue. Some states give lenders flexibility in how they pursue defaults, but many lenders choose not to sue because defaulting borrowers often don’t have much to sue for.

• List of State Laws on Recourse Loans

Look up your state and see your state's rules on deficiency judgments. Refinances, second mortgages, and "cash out" transactions tend to create recourse loans.
Purchase loans for your primary residence are most likely non-recourse loans in non-recourse states.

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Family Loan

Borrowers sometimes find that a family loan is the best option. What does it take to set up a family loan properly? You have to consider financial and personal topics to make sure the loan does not become a nightmare.

What is a Family Loan?

A family loan is any loan between family members. It doesn’t matter what the money is for. It’s just a loan that does not use a bank or other traditional lender.

Financial Considerations

To properly design a family loan, the deal must make financial sense. It should be:

1. A good deal for the borrower
2. A good deal for the lender
3. Compliant with local laws and tax laws

If you start with the goal of a win/win situation, your family loan has a better shot at success.

Tax Laws

Forgiving loan balances or payments, and charging too little interest on a family loan can create problems. Make sure you consult with a tax expert to see if your loan follows all the rules. Lenders generally have to charge at least the Applicable Federal Rate (AFR), and follow other requirements.

Emotional Considerations

A family loan is more than a business transaction. Since you know the other party, you should be aware that personal issues make the deal more complicated. Relationships can end on a sour note, holidays can be awkward, and others (who were not part of the deal) can end up in a tough situation if a family loan goes bad.
To reduce the likelihood of problems, be open about everything. There’s no such thing as being too precise or clear about your objectives. Double check with your family members to ensure they see things the same way you do.
Some people say that these loans are always a bad idea. They suggest that you give the money to the family member, or find another way to help them indirectly. Consider all the possibilities before making a family loan.

• How Co-Signing Works

Another suggestion is that lenders should be prepared to lose money on the deal. If you’re not willing to risk kissing that money goodbye, a family loan is a bad idea unless you have collateral.

Documentation

The best way to do a family loan is with a formal document. Spell out the terms of the loan just like a bank would. If any collateral is used, be sure the document is sufficient to secure the lender’s interest (work with an attorney to make sure documents will work in your state).

• How Collateral Works

Good documentation keeps everybody on the same page. You can find sample documents online, purchase loan agreements specific to your needs, or pay a service provider to formalize your family loan for you.

Family Loan Services

If you want help with a family loan, there are several services that provide documentation, legal matters, and payments. These P2P lending sites may help with your family loan:

• Customizable loans: Virgin Money and their Family Mortgage program
• Student loans: GreenNote

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IRA Loan

When you need money, an IRA loan may come to mind. Technically, it’s not possible to borrow from your IRA. However, you can do a few things that act like an IRA loan for quick cash. Learn what your options are.

Is an IRA Loan Allowed?

No. IRS rules dictate what you can do with IRAs and only allow 'distributions' from an account.
If you want to review the rules governing your account, check with the IRS or a tax advisor about taking an IRA loan.

Alternatives to IRA Loans

Since you can’t do an IRA loan, you’ll have to try an alternative. You may be able to tap IRA assets using a 60 day rollover. You have to follow some strict IRS rules, but this technique can act like a short term IRA loan.
You might also be able to borrow against balances in company retirement plans such as 401(k) plans. Your plan must allow loans, and you’re taking a few risks (including defaulting on the loan resulting in taxes and penalties). Work with your HR department and tax advisor to understand this technique.

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Credit Union Loans

Credit union loans are among the most competitive loans available. How can you get one? You’ll need to become a member before you qualify for a credit union loan. Find out what it takes to get a credit union loan.

How Credit Unions Work

If you’ve never used a credit union, you may think they’re the same as banks. There are plenty of similarities, but credit unions are nonprofits owned by their customers. These characteristics often help credit union loan rates stay low.

• Fast Facts About Credit Unions

Credit union loans come in a variety of flavors, but small institutions might have fewer options:

1. Unsecured (Signature) loans
2. Home equity loans
3. Auto loans
4. Business loans
5. Student loans

Becoming a Member

Before applying for a credit union loan, you have to become a ‘member’. As long as you meet their criteria you’re in. You’ll often qualify by sharing characteristics with other members such as where you work or where you live.
If you need to find a credit union that will accept you, try the credit union search tool.

Applying

Contact the credit union and let them know you’re interested in borrowing money. Applying for membership is usually very quick and easy. Once you’re a member, you can apply for the loan.
Like bank loans, credit union loans usually require you to prove your creditworthiness. You’ll need to prove you can repay the loan or use a co-signer.

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