What Is an Auto Loan? A Comprehensive Guide to Vehicle Financing
You can get access to your FICO® Score for free through Experian. Banking services provided by Community Federal Savings Bank, Member FDIC. There are three financing options to choose a lender for your Car Loan. Are you looking to purchase a car but lack the necessary funds to make a purchase? A clear understanding of Auto Loan meaning and how it works can help you with a hassle-free Car Loan journey with your lender.
You agree to pay back the funds over a set period of time, plus any fees and interest you accrue. But before you pick out your next set of wheels, it’s a good idea to do a little homework on auto financing first. In this article, we’ll take a closer look at the most common types of car loans, auto loan lenders, important key terms to know and how to prepare to apply. Note that while you’re paying off your auto loan, the lender will be a lienholder on your car, meaning they can repossess the vehicle if you fail to make your payments.
What Is an Auto Loan? A Comprehensive Guide to Vehicle Financing
Do not be afraid to tell the dealership what rates are available to you to see if they can beat it. In addition, dealerships will have different financing options available, and rates and terms may vary by many factors, including new versus pre-owned. In short, it is best to look at many financing options before making a vehicle purchase and financing decision.
While getting a car loan can be more complex than a personal loan, it is still possible to do it yourself and land a good deal. You should run the numbers before getting an auto loan so you’ll know what to expect. Use the Bankrate auto loan calculator to compare borrowing costs on auto loans with different rates and terms.
During this repayment period, most lenders will also hold onto your car title. If you successfully repay the loan, the lender will be removed as a lienholder and will then release the title to you. Online lenders may be more likely to work with borrowers with subpar credit scores. When buying a car, you can either pay for the vehicle with cash upfront or use an auto loan. When you use an auto loan to buy a car, the vehicle’s seller is paid all at once when the loan is issued, and you then make monthly payments to the lender for a set period of time. You can also apply for a loan to buy out a lease or refinance an existing loan.
Unsecured Car Loan
Or you can use dealer financing to make the process more seamless. You can typically expect higher financing costs at a dealership, though you might be able to negotiate or qualify for a financing deal. Unsecured auto loans are personal loans used to purchase a new or used car.
Types of Car Loans
When it comes to auto financing, it’s a good idea to spend some time shopping around for the best deal for you. You can compare terms from different lenders such as banks, credit unions and other financial institutions to see if their offers can beat your dealer’s. This type of financing is offered by dealerships directly to borrowers—sometimes through the dealership itself or through lenders it has partnered with. If you have bad credit, you might have an easier time qualifying for in-house financing compared to getting an auto loan through a direct lender. Many auto loan lenders require a down payment of at least 10% of the car’s purchase price. Generally, it’s a good idea to put down at least 20% for a new car and at least 10% for a used car.
You may find that new-vehicle loans have lower rates than used-car loans and sometimes come with special incentives. Your loan term (or repayment term) is the amount of time you’re given to repay your loan. Terms for auto loans usually range from 24 to 84 months, depending on the lender. As a consumer, you can choose between financing your purchase through the dealer (indirect financing) or finding and what is auto loan securing a lender yourself (direct financing).
- You can also apply for a loan to buy out a lease or refinance an existing loan.
- If you do not repay the loan, you risk losing the vehicle, as it serves as collateral.
- You work with the dealer to fill out your auto loan application, which the dealer then sends to a lender or lenders.
- Auto loans are also available for refinancing your current car loan or for purchasing a car that is nearing the end of its lease term.
- You may find that new-vehicle loans have lower rates than used-car loans and sometimes come with special incentives.
If you’re struggling to get approved for an auto loan, applying with a co-signer could increase your approval chances. This is someone with good credit—such as a parent, another relative, or a trusted friend—who is willing to share responsibility for your auto loan. This is the amount of money you borrow and agree to pay back to the lender. Note that this doesn’t include interest, fees, penalties or other costs.
Your loan amount, interest rate and repayment period determine your monthly payment. Use an auto loan calculator to get an estimate of your monthly payment. Secured car loans typically use the car itself as that collateral. If you apply for a secured loan, you may have better approval odds and a more attractive interest rate, as the lender can repossess the vehicle if you default. A car loan is paid back to the lender in monthly installments called loan payments.
Taking your time to follow these steps can help you to find the best deal for yourself. If there are any errors in your credit history, you will want to go through the process to fix those. Then, when at the dealership, see what rates and terms they have to offer, so you are ready to compare loan options.
Just make sure you know what they are selling you and know how much you are being charged for it. Determine what options are available to you to pay for the vehicle. Use a lease versus purchase calculator to determine which option is better for you. The simple fact that a new vehicle will cost more than an identical pre-owned vehicle will affect the amount of money borrowed. However, when purchasing a new vehicle, some manufacturers offer low, or even 0%, financing options. In general, rates on new vehicles, for these reasons, tend to be lower.
Comparing your options and getting the right loan could save you hundreds or thousands of dollars. Refinancing your auto loan is often used to get a more affordable rate or extend your loan term to lower your monthly payment. You can also refinance to reduce your loan term and pay your loan off faster. Cars are expensive, which is why many people rely on auto loans to finance them.
