How do car loans work?

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Woman in car bought with car loan

Buying a car is one of the biggest purchases you can make in life, which means finding the right model is usually the top priority. While this is important, understanding financing is also important. Knowing how car loans work will help you find the loan that offers the best value for money for your needs.

Car Loan Agreement

A car loan it involves borrowing money from a lender who provides funds to pay for a vehicle upfront. The borrower repays the debt in monthly installments, including interest, according to the agreed terms.

Factors that influence a car loan

Three main factors affect the structure of an auto loan and how much the loan will cost overall.

Loan amount – The amount of money you borrow, known as equity, is the basis of the loan and can be reduced by any trade-in or advance payment you do.

April – The annual percentage rate is the interest rate applied to the principal and lender’s commissions. The higher the APR, the higher the total costs of the loan.

Duration of the loan – The term establishes how long it will take you to repay the loan and, once the loan amount and the APR have been decided, it will determine your monthly payment. Auto loans are generally 36 to 72 months in length.

How to save on a car loan

Here are five ways to lower interest and cut the cost of an auto loan.

Borrow less – The less you borrow, the less interest your loan will accrue. A trade-in and down payment are common ways to achieve this, but there are other options as well. Consider negotiating the price of the car, buying a used vehicle instead of a new one, or opting for a less expensive model.

Get a shorter deadline – Given a specific loan amount and an APR, a shorter term will result in a lower total interest charge than a longer one. The other effect of a shorter loan is a higher monthly payment, so it’s worth weighing the potential benefit of saving on interest versus a payment that fits your budget.

Here is a case in point. A car buyer is offered a loan of $ 20,000 at 5% in April in 72 months. The monthly payment is $ 322 and the total interest charge is $ 3,191. By shortening the loan to 60 months, the monthly payment rises to $ 377 but the interest drops to $ 2,646, a saving of $ 545 over the life of the contract.

Improve your credit – Your credit score is a key factor in most auto loan decisions. You may want to improve your score to increase your chances of approval and a lower rate, especially if you have bad credit. * The Consumer Financial Protection Office advises the following approaches to obtain and maintain a good score:

  • Check your credit reports and dispute any errors you find
  • Recover any late or missed credit payments
  • Keep Payments Regular
  • Use no more than 30 percent of your total credit limit
  • Request only the credit you need

Pay in advance or extra – Most auto loans are simple rate loans so interest is calculated daily. With this type of loan, any prepayment or extra payment reduces the residual principal and the amount of interest due. For example, you can set up the payment before the due date, make half the payment twice a month, add to the monthly payment, or pay a lump sum.

Refinance your loan – Another path is to refinance a loan with another lender. When a customer is approved for refinancing, the new lender will pay off the existing note and provide a new loan with different terms, such as a lower April. If you didn’t get the best deal the first time around, market rates have dropped or yours credit improvedthis could be for you.

Where to get funding

There are two main options for obtaining car financing: through a dealership or directly from the lender.

indirect lenders – Car dealerships offer customers the convenience of getting their car and financing at the same time. The dealership will use a third party to provide the funds and may raise the APR to compensate itself for the role it played in the process. The contract, on the other hand, is between the customer and the reseller.

direct lendersTo apply for a loan directly from the lender, whether at a bank branch or credit union or through an online provider, it is a low-pressure way to seek funding. It also allows the customer to visit the pre-approved dealership. This can help them stay within budget and confidently negotiate on the price of their vehicle. A lender like RoadLoans makes the whole process simple with a short one online applicationimmediate decisions and a trusted dealer network.

Make the right choice

It’s easy to accept a loan offer when it paves the way for buying your car. Understanding how auto loans work, however, will give you a better idea if that loan really meets your needs. The loan amount, the APR and the loan term are all significant factors that influence the type of car you can afford and how much you will pay for your money.

Remember that everyone’s situation is different and while saving on interest may be the goal for one person, a lower monthly payment at the expense of higher overall costs may be more important for someone else. Use ours car loan calculators to estimate what might work for you, and apply for a loan online.

* “Bad” or “poor” credit is generally considered a FICO score of around 600 and below by sources including the Consumer Federation of America and the National Credit Reporting Association (reported by the Associated Press),, Credit. com, Investopedia, and others. The Congressional Budget Office identifies a FICO score of 620 as the “cutoff” for first-rate loans. FICO scores aren’t the only factor in and Santander Consumer USA’s lending decisions.

This article was published by: Rob Looker by title: How do car loans work?.

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