Did you know that roughly 107 million people in the United States now have a car loan? Since cars represent a costly investment many people that need them can’t afford to purchase them with one lump cash payment.
Luckily, car loans provide you with financial assistance so you can gradually pay for your car over some time. If it’s your first time applying for a car loan, then you might be feeling overwhelmed.
While this is perfectly natural, you must learn exactly how car loans work before you apply. That way, you know exactly what you’re getting yourself into.
Luckily, we’ve organized this article to help show you the ins and outs of car loans. In it, we’ll go over some car loan basics, as well as ways to find a good deal and save some money along the way. Let’s get started!
What Is a Car Loan?
Before we begin, it’s important that we first go over exactly what a car loan is. Essentially a car loan is an amount of money that you purchase from a lender. This money is used to purchase a car when people can’t pay for the entire thing themselves.
Until you pay off this car loan, the lender is technically the owner of the car. This means that if you’re not paying the monthly loan payments, then the lender has the right to take your vehicle away.
Like secured personal loans, most auto loans use something as collateral, as a down payment. This is ideal because it means your interest rate on the loan isn’t as high. Once you pay off every cent of the loan, then you officially own the car. As such, the sooner you can pay it off, the better.
Car Loan Terms You Should Know
When you’re shopping for a car loan you’re going to hear some frequent terms thrown around. Often, it’s assumed that you know about these terms, so it’s crucial to have a basic idea of what they represent.
There are three terms you need to be familiar with: down payment, loan term, and interest rate, or Annual Percentage Rate (APR). Let’s start with the down payment.
This refers to the amount of money you’re paying out-of-pocket before the loan begins. When you put down and down payment at the beginning of your loan that amount is subtracted from the amount that you’re borrowing. So for instance, let’s say you’re purchasing a vehicle that costs $40,000.
You put down $5,000 as a downpayment which means you’re burrowing a $35,000 loan. Next is the loan term. This refers to the amount of time that you will need to make payment. Most loans come with lengths that range between thirty-six months to seventy-two months.
However, some can be much lower. Finally, there’s the interest rate or APR. This is the amount of money that the lender will charge on the loan amount, in the form of a percentage.
This is the way that lenders can make money when they allow someone to borrow money for a car. The smaller your APR, the less money you will need to pay overtime to the lender.
So how is your interest rate determined? The lender will look at factors like your credit score, vehicle type, credit history, down payment amount, and the term of your loan.
How Much Does the Average Car Loan Cost?
Ultimately, your car loan will cost the price of the car, minus your down payment, and the money added by an interest rate. The typical new car costs roughly $36,000. Used vehicles, on the other hand, cost an average of $20,000.
Once you subtract your down payment, you should add between $1,000 and $3,000 to the price of the loan. This will cover your interest payments.
This amount can be more or less depending on the price of the car and the other factors we discussed in the APR section. As such, to find the exact amount you will need to calculate the percentage of your loan and then add that to the final amount.
Should You Get a Car Loan?
At the end of the day, a car loan isn’t for everyone. The last thing you want is to get overwhelmed by the payments and fall behind schedule. Not only can this cause you to lose the car and valuable money, but it can also decimate your credit score.
No one will want to lend to you in the future if they see that you can’t handle your car loan payments. As such, you should take a close look at your finances before committing to it.
Generally, it’s recommended that your vehicle loans (this also includes things like boats, ATVs, and anything else with a motor) should not exceed 50% of your gross income. If that much of your funds are tied up in vehicle loans, then it will stretch your rent/mortgage payments, groceries, and utility bills way too far.
It might also be wise to wait for a little until you can build up a good amount for a down payment. This is the secret to paying off your auto loan quickly and with less interest.
Where Can You Shop For a Car Loan?
You should never pick the first auto loan. offered to you. Even if it’s a good, fair deal, you want to make sure that you’re getting the best loan possible. And, to do that, you will need to shop around with different lenders.
There are three different types of lenders that you can get car loans from banks, finance companies, and credit unions. The first place you can go is your bank. This is a good option because they already have a lot of information on you, in terms of your checking and savings account. While mortgages are usually more popular with banks, many still provide car loans.
So, it’s worth checking out in your area. Finance companies, like Plenti, can also provide you with car loans. These types of companies can be associated with either national or regional banks.
Or, they can be tied to the automakers of certain types of cars. For example, if you purchase a car from a Ford dealership, then you can probably get a loan from Ford’s financial services. Finally, there are credit unions.
These types of organizations work in a way that’s very similar to banks. However, the difference is that they’re mutually owned by the people who deposit their money in them. As such, they can usually offer some slightly better interest rates if you belong to one.
Ways to Save Money When Applying For a Car Loan
As we mentioned before, one of the best ways to save money on your car loan is to pay as much as you possibly can on a down payment. This will likely significantly lower the amount of money you need to pay on your interest payments.
So, will have a low credit score. As such, it’s worth it to work on improving your credit score before you begin applying for loans. Speaking of interest payments, it’s important to shop around until you find the lowest possible one.
Don’t forget to pay attention to the term length too. A loan with a low-interest rate, but a long-term length, can add up to a lot of money. So how do you save money while you’re paying for your car loan? The first way is to round up. When you make a payment, round up the amount you pay to the nearest hundred.
This will both allow you to save more money when it comes to interest payments. Plus, you’ll pay your loan off more quickly. Speaking of paying off your loan quickly, you should also try to make extra payments whenever you can afford it.
However, make sure that this is allowed first. Some companies charge a fee when you make extra payments. If you aren’t happy with your interest rates, then you can also try refinancing. When you do this in the middle of your loan you can often get much lower rates.
Enjoy This Article About Financial Assistance? Keep Exploring
We hope this article helped show you exactly how car loans work. As you can see, car loans are an important form of financial assistance for people who need cars but can pay for them all at once.
However, the last thing you want is to receive a bad loan that costs way too much. As such, you should shop around carefully and make sure you understand all of the terms and agreements before proceeding.
Did you enjoy this article? If the answer is yes, then you’re in the right place. Keep reading to find more topics that you’re sure to love.