An auto loan is a type of financing that allows you to purchase a vehicle by paying off the remaining balance on your existing car or truck. As the name suggests, this type of financing is secured by your automobile, meaning that the lender has a lien against the vehicle’s VIN (vehicle identification number).
The amount you pay for an auto loan is made up of two parts: principal and interest. Principal is the amount you pay upfront and interest is the cost of borrowing money each year, calculated on top of the initial purchase price of your vehicle. An important factor when evaluating an Auto Loan is the rate, or annual percentage rate (APR). This figure is determined by a number of factors, including your credit score, term and payment amounts.
When shopping for an auto loan, you should compare rates from different lenders to ensure that you’re getting the best deal. You can also increase your chances of approval by applying with a cosigner, someone who is willing to take on liability for the loan if you are unable to make payments on time.
Many people spend a lot of time deciding what type of vehicle they want to buy and not enough time considering their financing options. That’s a mistake, because finding the right financing can often save you a significant amount of money in the long run.
Investopedia Explains Auto Loan
Most consumers are familiar with the process of buying a vehicle, but few realize that there is a separate financing process that goes along with it. When you apply for an auto loan, the lender will run a hard inquiry on your credit report to determine your eligibility. This will affect your credit score, so you should do what you can to raise your credit score before applying for an auto loan.
Depending on your lender and the type of vehicle you’re purchasing, an auto loan may have a repayment term of anywhere from 36 to 96 months (or three to eight years). A longer loan term will reduce your monthly payment, but it will also require you to pay more in total interest charges.
Dealerships frequently offer their own in-house auto financing, which can be an attractive option for people with bad credit. However, it’s wise to shop around and look for offers from direct lenders before choosing a dealer’s in-house financing. Many online lenders are competing for your business and can provide you with an instant quote without a hard inquiry on your credit. Some can even help you find a rate before you go to the dealership, which can help you negotiate with the dealer. If you decide to use a dealer-arranged loan, be sure to ask about any prepayment penalties that could affect your finances. In most cases, a prepayment penalty will be equal to the amount you paid for your vehicle. That way, you can avoid any surprises. In some cases, you might be able to negotiate the penalty down to the value of your trade-in vehicle.