Car loans offer a type of funding that allows you to buy a vehicle by taking out a lump sum from a lender. After that, the loan will be paid off over a certain period. The lifetime of an auto loan can be from two to seven years. The term, interest rate, and loan size determine the monthly payment. In this article, we are going to talk more about car loans, how they work, and how to qualify for them.
The Basics of Car Loans
Let’s get started. Taking out an auto loan can be useful for consumers who wish to purchase an auto but don’t have enough cash or savings. If you obtain a car loan, the crediting institution will issue the funding assistance in the form of a lump sum for you to purchase an auto. Once you sign the contract with the lender, you can drive your car freely, provided that you understand your obligations as a borrower.
You will need to make regular loan payments together with the interest rate until the full sum is paid off to the lender. You might face additional fees and penalties if you fail to make the on-time monthly payments.
The creditor holds the title to the auto until the borrower fully pays the debt off and may repossess it if the borrower falls behind on loan payments. You need to submit an application for a car loan and get approved by the creditor.
Some consumers search for other ways to get additional cash. The question “how much can you borrow from an IRA?” is on their top Google search results list. Besides, you can tap your own emergency fund or a savings account, but getting a regular car loan is the most affordable option. You can be pre-qualified for this lending tool in just a few minutes by the lender and check what interest rate you may be offered.
Auto Loan Terms to Understand
Car loans are rather popular today. Millions of people take out auto loans when they plan to purchase a vehicle. The quarterly report on Household Debt and Credit issued by the Federal Reserve Bank of New York states that there were over 260 million car loan accounts in the first quarter of 2019.
Source: https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2019Q4.pdf
There are a few widespread terms you need to know while shopping for an auto loan, such as:
Interest Rate
What is an interest rate? It is the amount a crediting partner charges for issuing the funding. The interest rate shows how much a borrower is expected to pay in interest every month.
This sum is calculated in percentage. The lower your interest rate, the less you will need to pay in interest. An excellent or good credit rating is necessary to qualify for a low-interest rate. If you experienced issues with loan repayment in the past and your score is less-than-stellar, you may qualify for a higher rate.
Principal
It is the sum you borrow from a lender. This amount of funds doesn’t include fees, interest rates, penalties, and other charges. It needs to be repaid to the creditor.
Annual Percentage Rate
The APR is the interest and any charges you need to pay on your car loan. The total cost of borrowing depends on the APR. The higher it is, the higher your total cost of borrowing will be. It pays to compare your offers and shop around till you find the most attractive APR.
Down Payment
It is the sum a borrower needs to pay upfront. It may be a trade-in or cash. Some crediting companies ask for a 10% down payment or more. It means you need to cover at least 10% of the auto’s purchase price and then fund the remainder with an auto loan. Typically, financial experts advise you to pay 20% or more if you are about to purchase a new auto and 10% or more for a used one.
Monthly Payment
It is the monthly amount a borrower needs to cover for a car loan. Keep in mind that not the whole sum of your monthly payment goes toward the principal. A portion will go toward covering the interest rates.
Private Creditor vs. Dealer Financing
Many consumers doubt whether they should turn to the dealer or try private lending tools. Experts believe it is better to shop around as the terms and lending conditions may vary significantly among service providers. Sometimes, the insurance company, only the lender, or a local bank can offer better terms on auto loans. Besides, you may come across a dealer with attractive offers.
You may turn to several lending institutions and compare their conditions and interest rates. This option is called direct financing. The opposite type is dealer financing. It means a dealership works with a creditor to provide funding to the borrower. Generally speaking, direct financing tends to be cheaper than dealer financing. The dealership usually charges a commission for its services.
The Car Loan Should Work for Your Situation
If you have some time to compare lending tools, you may get several offers from creditors. Each offer will be presented for different loan terms and interest rates. As a result, your monthly payments will be different as well. Lower interest is typically offered for a longer period, while a short-term loan often includes higher rates. What should you choose?
You aim to select a balanced lending offer that fits your monthly budget. Don’t request a sum you can’t afford to repay. Using an auto loan calculator can help you determine potential fees and monthly payments if you input different rates and loan sums. This is a great way to check various scenarios of your payments and opt for the most attractive loan offer.
The Bottom Line
Getting a car loan is helpful if you want to buy an auto but don’t have enough cash to finance this big-ticket purchase. There are several lending options, including direct financing and dealer financing. Every borrower has the right to compare lending tools and choose the offer with the most reasonable rates. Keep in mind that the total cost of borrowing will consist of the principal as well as interest and other fees.
