If you want to get behind the wheel of a vehicle, you must first arrange for vehicle financing. An auto loan is simply money you borrow to pay for the vehicle. Auto loan terms vary, so it is important to understand the process to get the best auto loan possible. Auto loan details vary, which means getting the right loan could save you hundreds or thousands of dollars over time. Understanding the process can help you get the best auto loan possible.
What an auto loan is
An auto loan allows you to borrow money from a lender and use that money to purchase a car. You’ll have to repay the loan in fixed installments over a set period, and interest will be charged on the money you borrow.
If you have a high credit score, you may be able to qualify for a lower interest rate, which will save you money over time. Your credit score also helps determine the initial loan amount and required down payment.
Terms to know
Before shopping for an auto loan, familiarize yourself with these terms:
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Interest rate: This is the annual fee the lender assesses to borrow the funds needed to buy the vehicle. A higher credit score or shorter loan term generally equates to a lower interest rate.
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Annual percentage rate (APR): The APR is the total borrowing cost of the loan, including the interest rate and other fees, expressed as an annual percentage.
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Down payment: You will pay this amount to the lender before taking out the loan. It will be applied toward the total purchase price. The more you put down, the lower your monthly payments will be.
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Loan term: The loan term or repayment period is the window of time during which you’ll make payments on the auto loan.
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Principal: This is the amount you’re borrowing to purchase the vehicle minus the interest and fees. The principal plus the down payment equals the cost of the car.
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Total cost of the loan: This figure includes the principal, interest and fees paid to acquire the vehicle.
