If you want to buy a car without paying entirely in cash, you will need to apply for vehicle financing. A car loan is the money you borrow to pay for your vehicle. Includes the vehicle’s purchase price, interest and applicable fees.
Compare options to get the right loan and save hundreds or thousands of dollars. Understanding the key terminology for car loans can help you do just that.
What is a car loan?
A car loan is a type of installment loan that allows you to borrow money from a lender to buy a car. You will pay off your loan in a fixed installment and you will be charged interest on the money you borrow.
Your credit score will help you determine the down payment you need and the amount of loans you can borrow. Scores from the mid-600s and above will qualify for lower interest rates and save money.
People with poor credit scores can have a hard time securing car loans at competitive rates. Lenders tend to view borrowers with lower credit scores as more risky, resulting in higher fees. If you have a lower credit score, consider looking for a bad credit car loan with a more generous acceptance criteria. You can also wait for your car to purchase until you improve your credit score.
Important Terms to Know When Obtaining a Car Loan
How automatic loans work
Compare car loan lenders, apply and approve, and receive a lump sum payment to buy the vehicle. Following that, you make monthly payments and pay back interest and fees in addition to the loan. If you don’t pay off your loan, you risk losing your vehicle as the vehicle will act as collateral.
The type of loan that best suits you depends on factors such as your credit score, loan amount, and vehicle you need. Lenders usually want to see normal income, low debt income (DTI) ratios and excellent credit scores. The stronger your credit score, the more competitive your rate.
Types of car loans
There are three funding options to choose from. It can be a dealer’s financing, a car loan from a bank, or a credit union and loan from an online lender.
Dealer Funding
Financing a dealer is the easiest way to get a car loan, but it is not always the most cost-effective. You can shop and raise funds in one place. Dealers will probably do a hard credit check. If you have a strong credit score, you can qualify for a promotional rate from the manufacturer if you pass an authorized dealer.
However, dealer funding tends to have higher interest rates. Dealers often make fees or markups when they match funding from banks or credit unions.
Bank or credit union car loans
Traditional banks and credit unions offer car loans if they don’t want to go through the dealership. However, it may take longer than passing through the dealer. Generally, expect to wait between one business day and a week to get a loan from a bank or credit union.
Online Auto Loan
You can also apply for a car loan online. These loans are often processed remotely, but the procedure is similar to getting a car loan from a bank or credit union. Depending on the lender, it may take less than one business day for approval.
Online lenders may be more likely to work with borrowers with subcredit scores. Some offer a preferred credit car loan fee.
How to compare car loans
The best way to compare car loans is to look at key costs, including interest rates, term and fees. Look at both the estimated monthly payments and the totals paid over the loan period.
Annual rate
APR is one of the most important numbers when deciding on a loan. Determine the total borrowing cost. APRs are based on your credit score, income, and loan duration and amount.
If you are in the market for long-term loans, or if your credit score is fair or poor, expect a higher interest rate. A shorter loan term or a higher credit score means you are more likely to have access to better rates. Lenders also take into account fees, so check the structure of your loan.
Ideally, I’d like to get a lower APR receives more affordable monthly payments and keep more money in my pocket. If your APR is just a few points higher, the loan can be much more expensive.
According to State State of Experian’s Automotive Finance Market Report, the average new car loan rates for consumers with excellent credit and very inadequate credits were 4.77% and 15.75%, respectively.
To illustrate, imagine getting a 48-month $36,000 car loan. Here are the amounts you pay each month and the total amount you pay in interest over the loan period:
| interest rate | 6% | 8% |
|---|---|---|
| Monthly payment | $845 | $879 |
| Total borrowing cost | $4,582 | $6,186 |
semester
There are several months to sets to pay off your car loan. Typical car loan periods range from 24 to 84 months.
If you plan to buy a new car and store it for a long time, cut your monthly payments by taking away the long-term loan. However, over time you will be paid more interest and charge higher interest rates. To save, select a shorter term. Make sure your payments are within your budget.
For example, assume you are approved on a $36,000 loan at a 6% interest rate. Look at the payments and interest costs for different loan terms:
| Loan period | 36 months | 60 months |
|---|---|---|
| Monthly payment | $1,095 | $696 |
| Total borrowing cost | $3,427 | $5,759 |
Fee
The two main prices shown are origination fees and document fees. The origination fee is the amount you pay to secure a loan. Document fees cover lenders’ costs to secure a loan. If you raise funds through a dealer, you may encounter other fees, but many of these fees are negotiable.
Conclusion
A car loan is a contract between the lender and your borrower, allowing you to borrow money for the agreed period of time you purchase the vehicle. Getting a car loan can be more complicated than a personal loan, but you can still do it yourself and make a good landing. It takes time and research.
