What Is an Auto Loan?
Auto loans are a type of personal loan used to purchase new or used vehicles. When you sign up for an auto loan, the bank or credit union gives you a set amount of money that you can use to buy the car. You pay back this loan with interest over time.
You will need to present proof of income and other documents when applying for the loan, and you will want to ensure that your monthly payments will be affordable. The interest rates on auto loans are based on the loan term, the applicant’s credit history, and the value of their vehicle. Read on for more knowledge on auto loans.
Types of Auto Loans
1. New car loans
A new car loan is a loan for a new vehicle that you finance with an auto lender. You can use this loan to purchase or lease a new or used vehicle, including trucks, vans, and SUVs. However, these loans are generally more expensive than other types of auto financing because they require an upfront payment and interest over time.
2. Used car loans
A used car loan is a type of auto loan you get when you finance the purchase of a used vehicle. Used auto financing may be available from private lenders, credit unions, and dealerships. Used auto loans do not involve any equity in your vehicle and therefore have lower interest rates than new auto loans.
3. Auto refinance loans
An auto refinance loan differs from an auto loan in that it allows you to take out a new loan to pay off your current one. In this situation, you would still be responsible for paying for the new loan and your existing vehicle. If you’re looking at refinancing because your credit score has improved, this could be a good option since it will help boost your credit score without paying another dime in interest charges.
Factors to Use When Comparing Auto Loans
Annual percentage rate (APR)
The APR is the most critical factor in your auto loan decision because it represents the interest rate you are paying on your loan, which is then multiplied by the number of months you plan to keep the car. When comparing one lender’s APR to another, it’s essential to consider both the lender’s interest rate and how long you have to make payments before you own the vehicle.
Some lenders offer longer terms than others, so look for at least three years of financing when comparing APRs. If a lender requires a down payment of $1,000 or less, be sure to ask whether that amount will count toward your credit limit if you decide to upgrade or purchase another vehicle within the first year or two after purchasing yours.
Fees
The. fees for a car loan can be a significant factor in deciding which company to choose. Some lenders charge more when you use them than others. The most common fees that car dealers charge are:
Processing fee: This is the cost of processing the loan application. It may include a service fee and various other charges.
Origination fee: is the amount your lender pays to the lender you’re borrowing from, such as Ally Financial or GE Capital Retail Bank. The origination fee is usually 0% APR for the first six months, but it could change depending on whether you have a good credit score. You should read all terms and conditions before signing any documents related to your auto loan.
Credit score fee: This is the cost of getting your credit score from one of several companies approved by lenders and used by lenders like Bankrate.com and Credit Karma. Your credit score may be used as collateral if you default on your loan or apply for another soon.
Term
The loan term is the amount of time it takes to repay the auto loan. The longer you pay your loan, the more expensive it will be. For example, a 60-month loan with a 5% interest rate would cost $3,836 per month, while a 48-month loan with a 5% interest rate would only cost $3,076 per month.
The longer the repayment period, the higher your monthly payments will be. If you want to make sure you can afford your car payments monthly, look for loans with shorter terms.
Steps of Securing an Auto Loan
1. Do your research
Before looking for loans, make sure you know exactly what kind of vehicle you want and how much money you can afford to put down on a new car. An excellent way to figure this out is by reading consumer reports on the vehicles that interest you. These will tell you which models have the best resale value, how much they cost to operate over the long term, and their safety ratings.
Once you’ve decided which model and price range best suit your needs, compare multiple lenders’ rates and terms to find one that makes sense for your budget; if possible, visit dealerships in different areas of town to see how much financing costs each lender.
2. Get pre-approved
Before applying for a loan, you must know what kind of financing you can qualify for. Check your credit score and look at the loan terms offered by lenders. If you don’t have perfect credit and do not want to pay extra fees, consider getting a pre-approval letter from a lender before you start shopping around. This will help you understand what loans are available and how much they cost.
Once you have a pre-approval letter, visit several lenders and compare interest rates and fees. The lender that offers the best deal may not be the one that gives you the most favorable terms; however, it should be able to give you more flexibility when it comes to repayment timeframes and payment amounts.
3. Shop around
Once your loan sails through, embark on shopping for cars. Ease your work by using the loan term, monthly payments, and interest rate to make comparisons.
4. Make the deal
Once you lock on a car, ask for a financing offer from the dealer and gauge it against other deals. If it suffices, make the deal. Take your time when handling the paperwork to ensure there are no hidden clauses.
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