When you are in the market to purchase a new car but don’t have the cash readily available to pay for the car, an auto loan can help you make that purchase. An auto loan can be issued from either direct lenders such as banks, credit unions, or other financial institutions like online lenders, or through your dealer’s finance department. To receive an auto loan, you will typically have to complete a loan application, agree to loan terms, and sign a contract acknowledging that you understand your loan terms.
Applying for an Auto Loan
Buying a vehicle, new or used, is no small purchase. In addition to researching which cars fulfill your needs and meet your criteria, you will also have to figure out how you’re going to pay for your car. While some individuals may be able to purchase their car in cash, many people choose to finance their vehicle.
How Does an Auto Loan Work?
An auto loan works very similar to other types of loans such as a home or student loan. First, you apply to take out a loan through an institution. Second, that institution reviews your application, and if you meet their lending criteria, agrees to loan you the money to help you purchase your car. Lastly, you agree to pay back the amount you borrowed via monthly payments, including interest. Your monthly payment will largely depend on how much you borrow and how much time you take to pay your loan back.
Terms You Must Know When You Are Exploring Your Loan Options
- Annual percentage rate, also known as APR, is the annual rate of interest charged to borrow money, including fees, expressed as a percentage. In short, the higher your APR is, the more money you will owe in return for the loan.
- A down payment is the payment you make upfront towards the cost of the car. A down payment could be cash, the trade-in value of your current vehicle, or both. The down payment is intended to help you lower the amount you need to finance. The more money you put down, the lower your monthly payments may be.
- A loan term, also referred to as a loan duration, is the amount of time you will have to pay down your loan. The longer your loan term, the more you’ll likely pay in interest over time.
- Your monthly payment is the amount you will owe each month to your lender. Your monthly payment consists of the principal, interest, and other fees, if applicable.
- Principal is the amount you are borrowing, not including the fees, penalties, interest, and other costs.
- Total cost refers to how much the loan will cost you over the loan term, or the total amount of interest and other finance charges you will pay for borrowing the money until it is paid back.
Possible Benefits of an Auto Loan
Getting an auto loan can also be beneficial for your credit. If you make your payments on time, your credit report will label your car loan as current. Payment history is an important factor which determines your credit score, so having an auto loan can potentially play a huge role in raising your credit score.
Before you start searching for your next vehicle, it is advised that you get pre-qualified for an auto loan. Pre-qualification is a conditional approval given to you from a lender with an estimate of the auto loan financing terms—such as the max loan amount, monthly payment, APR, and term length—for vehicles you are approved on.
At LoanCenter, you can pre-qualify for auto financing and explore your financing options with no impact to your credit score. The process is fast, and easy. Within a few minutes of entering your personal information such as your name, address, date of birth, and job information, you will receive personalized loan terms based on your credit profile.
Benefits of Pre-Qualifying for an Auto Loan
Getting pre-qualified for an auto loan can give you a better idea of how much you can borrow, your APR, and your projected monthly payment. Having these numbers in mind could make it easier to shop for cars that fit your loan terms and potentially cut the time spent at a dealership.
What is the difference between pre-approved and pre-qualified?
While the terms are sometimes used interchangeably, pre-qualification and pre-approval often refer to slightly different things. Pre-qualification is often used when the lender pulls a soft credit inquiry, which doesn’t affect your credit score. It’s the process in which you can get a better idea of your estimated loan terms based on your income. On the other hand, pre-approval often refers to the stage in the auto finance process where the lender has checked the buyer’s credit and verified the documentation to approve the specific loan amount.
There isn’t a one-size-fits-all method to the car-buying process. Before biting the bullet and settling for any auto loan, it’s recommended to do your research beforehand. Applying for an auto loan pre-qualification, understanding how an auto loan works, seeing what your credit score and monthly budget are, and shopping around for different loan options, are all important factors that must be taken into consideration before making the final decision.
Ready to get started? Prequalify for auto financing today.