Cars are an integral part of our daily lives. We use them to get to work, school, the grocery store and even to see friends or family. However, cars are not a cheap investment – and for many Americans, paying for a car outright is simply impossible. Therefore, a great way to use the vehicle that you like and need is to take out an auto loan.
By doing so, you can make smaller payments on the vehicle of your choice every month, and slowly pay off the entire cost. But there are many factors to be wary of, including your insurance rate, loan amount and credit score. By understanding all of these concepts, you can be a responsible car owner and pay off your loan successfully.
Auto Loan Terminology to Learn
Like most other types of loans, auto loans have lots of terminology involved that may seem mystifying at first. However, these concepts are really not all that complex once you understand how they work. Some of the most common auto loan keywords include:
- Interest: This is the amount of money that you have to pay every month that goes on top of the price of the car. Often referred to as the annual percentage rate (APR), your auto loan will have a percentage of your overall debt added onto the cost of your vehicle, which goes towards paying the dealership and/or the original auto loaner.
- Term: This is the amount of time that you have to make payments before your auto loan expires. This is often quite a long time, commonly ranging from five to eight years. Generally, longer loan terms mean lower monthly payments, but higher interest rates.
- Credit Score: This is the projected level of fiscal responsibility you have, based on your credit history and repayments of past credit card/loan debts. Low credit scores may be viewed unfavorably by auto loaners, as they can (although not always) be a sign of an unreliable loan borrower.
- Financing: If you choose to get a car from a dealership, financing is the way that you plan to pay for the car. Dealerships will often lay out a number of financing options available to you, including buying the car outright, setting up payment plans with the dealership itself, getting your own auto loan or leasing the car. If you need financial aid to purchase the car, choosing your own auto loan is almost always the preferred choice.
- Leasing: This is actually not related to loans at all, if you choose to lease a car instead of buying it outright or with a loan, you are choosing to make payments to simply use the car rather than to eventually own it. It can be helpful to see this as a long-term rental option, rather than a buying option.
Going in to the car buying process with these definitions in mind will make you a much savvier consumer, and by knowing to look for your best loan option with the lowest APR and best bonuses, you can avoid needless fees and headaches.
Pros & Cons to Financing a Car with an Auto Loan
Getting an auto loan is a big decision. There are positive and negative aspects of any loan, so it is important to be aware of these before making your final loan determination.
Some positive aspects of auto loans are:
- They are one of the best ways to eventually own a car if you cannot afford their expensive price tags
- They are flexible, as they can allow you to eventually refinance into a loan that can give you a better interest rate
- They often give plenty of time to make steady payments, and often do not require too much of a financial commitment at one time
However, a few of their downsides include the facts that:
- They are secured, which means that failure to make payments on the loan will result in the loss of your car
- They can have high interest rates if your credit score is poor
- They have limited loan terms, requiring you to pay off the cost of the car within a set timeframe
Weighing all of these factors carefully is critical if you wish to make the decision to get an auto loan. Some people will choose different repayment strategies. Therefore, you should consider the options that most closely fit your budget.
How to Get Your Best Auto Loan
Once you have decided that an auto loan is right for you, the final step is to choose and apply for the best loan available based on your eligibility. Perhaps the biggest factor that can determine how much you may need to pay is your credit score. In the eyes of auto loan companies, good scores represent less risk in giving the loan, while poor scores may not be able to qualify for a loan at all. Higher credit scores will also often get the best financing and cash back deals from car dealerships and manufacturers. However, different organizations provide different estimates, and you may be able to find an auto loan even with a poor credit score.
It is also important to keep in mind that your APR may vary widely depending on the loan provider that you choose, as well as the loan amount and term length. Low APRs (between 2 and 8 percent) are generally considered ideal if your credit score will allow them, as they will be adding the least possible amount to your overall debt every month. High APRs are fine if they are all that you can get – however, it is important in these cases to try to pay off your loan as soon as possible in these cases. The longer you are stuck paying a loan with a high monthly interest rate, the more money you are paying for your car in the long run.
The actual application for your loan is handled by your lender and/or car dealership of choice. It usually requires an agreement to terms and conditions, the details of your loan, a down payment (consisting of a small percentage of the car’s purchase price) and your identification/income information. Once you have agreed to their terms, you will be given information on how to make your monthly loan payments, and eventually, the keys to your car!
One final note to consider about auto loans is that they are a big commitment. Cars depreciate in value very quickly, so the original purchase price of your car will end up being much higher than the price of that same car in 5-10 years. Be sure that you are willing to pay for the entirety of your auto loan during your loan term, and try to ensure that you can get a worthwhile amount of use out of your car during and after your loan term as well. If all of that is possible, you can easily navigate getting an auto loan without unnecessary hassle.