Buying a new or used car is a big financial commitment. In fact, it could be one of the biggest purchases you make in your lifetime. If you can’t afford to pay cash for a new or used car, you’re not alone. Forty-four percent of Americans rely on car loans to purchase a new or used vehicle. How do car loans work? When should you apply for a car loan? Here’s what you need to know:
What Are Car Loans?
A car loan is money you borrow from a lender to purchase a new or used vehicle. Car loans work just like other loans. By taking out a car loan, you are agreeing to pay back the amount you borrow in addition to interest and other fees within a specific period of time.
Many different financial institutions offer car loans, including online lending companies, banks, credit unions, and some automotive dealerships. Car loan terms can vary depending on the lender you choose, so make sure you shop around to find the most attractive offer.
Do I Need A Down Payment for A Car Loan?
A down payment is the money you pay upfront for a new or used car. You can pay this in cash, use the trade-in value of your vehicle as a down payment, or both.
Most lenders require borrowers to make a down payment in order to qualify for a car loan. There are some lenders that allow borrowers to obtain a car loan without a down payment, but it’s best to make a down payment if you can afford to do so. This is because the size of your down payment could affect the terms of your car loan.
The larger your down payment, the less you will have to borrow to pay for your car. The less you borrow, the less you will end up paying in interest. In other words, making a larger down payment could save you money on interest over the course of the loan. Your monthly payments might also be lower since you aren’t borrowing as much money from the lender.
Making a large down payment could make it easier to get approved for a car loan, too. This is especially true for borrowers with lower credit scores. If your credit score isn’t perfect, increasing the size of your down payment could show the lender you are serious and help you get approved for a car loan.
The amount you put down upfront is up to you, but keep the above factors in mind when deciding the size of your down payment.
What Should I Know Before Taking Out A Car Loan?
You should never sign a loan agreement without understanding its key terms. But if you’ve never taken out a car loan before, you might not be familiar with some of the jargon often found in loan agreements. Here are some of the terms you should know before agreeing to the terms of a car loan:
- Annual percentage rate (APR): This is the annual cost of the loan, or the amount you are paying to borrow money from the lender. The APR is expressed as a percentage, and it includes the interest rate and other fees associated with the loan. The higher the APR, the more you will end up paying to the lender.
- Interest rate: Many people confuse the interest rate to the APR. The interest rate is similar to the APR, but with one exception. The APR includes the cost of fees associated with the loan, but the interest rate does not. Therefore, the interest rate is often lower than the APR.
- Actual Cash Value (ACV): This represents the value of the vehicle you are purchasing with the money from your car loan. This value is often pulled from an independent third party such as Kelley Blue Book.
- Guaranteed Auto Protection (GAP) insurance: This insurance is optional. It covers the difference between the amount you owe on the vehicle and the amount your insurance company pays you in the event your vehicle is stolen or totaled.
- Loan term: This is the amount of time you have to repay the lender. A loan term is typically expressed in months.
- Principal: This is the amount of money you are borrowing from the lender.
- Amortization: This term describes the process of paying off your car loan over time where part of each monthly payment is applied to the principal and another part is used to pay interest.
Learn these terms so you can read your car loan and understand your responsibilities as a borrower before you sign on the dotted line.
Should I Apply for A Car Loan Before Going to the Dealer?
If you are preparing to buy a new or used vehicle, you may wonder if it’s necessary to get approved for a car loan before you start shopping. The short answer to this question is yes. Here are some of the reasons why you shouldn’t wait until you get to a dealership to apply for a car loan:
- Shop around for the best rate. Applying for a car loan in advance gives you time to explore your options and find the best deal. If you wait until you’re at the dealership, you will have no choice but to accept whatever loan terms the dealer offers. Dealers typically offer higher interest rates than other lenders, so exploring your options before you start shopping could save you a lot of money.
- Customize loan terms. If you apply for a loan through LoanCenter, you can customize your terms and choose the loan structure that best fits your needs. But if you wait until you are at the dealership, you will be limited to the dealer’s terms.
- Know your limits. Applying for a loan ahead of time also helps you understand how much you can afford to spend on a new or used car. This way, you will know what type of vehicle you can afford to purchase before you start shopping.
- Focus on the car. You will have one less thing on your mind if you get pre-qualified for a car loan before you start shopping. This ensures you can focus solely on comparing different vehicles and choosing the right one for you.
How Can I Purchase A Vehicle With A Car Loan?
Financing a new or used car has never been easier. Here’s what to do:
- Get pre-qualified for a car loan. Provide us with basic information about the type of loan you are looking for and your monthly income.
- Find a car. We are partnered with over 30,000 dealerships. Browse our online inventory to see all of the vehicles you are qualified to purchase based on your selections such as desired monthly payment, vehicle price, body type, and more.
- Get financing terms. When you’re ready, print out your offer summary and take it to a participating dealership.
- Pick up your car. Visit the dealership to complete your final paperwork, get approved, and to drive your new car home!
That’s all it takes to get a car loan that will help you get behind the wheel of the new or used car of your dreams.
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