When you buy a car, you’re also taking on debt. To make sure you choose the best possible loan for your needs, it’s essential to understand how car loans work. In this article, we’ll go over some of the basics of financing a car.
What Is a Car Loan, and How Does It Work?
If you don’t have the cash on hand to buy a new car, an auto loan can make your dream of owning a vehicle a reality. Like any other loan, you borrow money from a lender and agree to return the money over a pre-determined period of time along with interest.
Car loans are paid back to the lender in monthly installments called loan payments. Depending on the amount, the term length, and the interest rate you’ll be charged, your monthly payment will vary.
Longer-term loans can help you save money on your monthly payments. But be aware that with a longer loan term, you could end up paying more for the car in total due to the interest charged over the life of the loan. If you end up owing more than the car is worth, you’ll be upside down on your loan.
Car Loan Terms You Should Know
APR — Annual percentage rate is the interest and fees you’ll pay on the loan yearly. The higher the APR, the more you’ll owe for borrowing the money.
Down payment — A percentage of the total cost of the car you pay upfront. It can be cash, or it may be the value of a vehicle trade-in.
Loan term —This is the time it will take you to pay off your loan. The longer your term, the more money you’ll have to pay in interest.
Monthly payment —The total amount you owe each month, including the principal, interest, and any other fees that may be included.
Principal — This is the amount of money you have borrowed minus fees, penalties, and interest.
Total cost — The total amount you pay over time for your new car.
Requirements for Getting a Car Loan
You’ll typically need to fill out a loan application to receive a car loan. Having the following information on hand will help make the process smoother:
– Social Security number – Current and previous addresses – Information on current and past employment – Total income and sources of income – Information on any debt you may have
