An auto loan can be simply described as money borrowed in order to purchase a car. Interest is charged on the amount borrowed and has to be paid in fixed instalments over a period of time. A high credit score is a free ticket to a reduced interest rate and asserts the initial loan amount and down payment.
Few terms you need to know before buying an auto loan
Interest rate- The annual fee the lender sets on the amount borrowed. A good credit score and shorter loan durations are directly related to a lower interest rate.
Annual percentage rate- The total sum of the loan, including the interest rate and other additional charges
Down payment- Price to be paid to the lender before processing the loan. It is a part of the total cost. The more the down payment, the lesser the monthly payments.
Loan term- The period during which you will make payments on the loan.
Principal- Original sum you’re acquiring to purchase the vehicle without the interest and fees. The principal and the down payment together add up to the cost of the car.
The total cost of the loan- Addition of the principal, interest and fees makes up the total cost of the loan.
Difference between an auto loan and a personal loan
- A personal loan can be used for infinite purposes, whereas an auto loan is solely for purchasing a car.
- Car loans are more secure
- They come with lower interest
- It is easier to qualify for a car loan
How to get an auto loan in 4 simple steps
- Understand the basics
Find out your credit score and current financial situation. Get a good idea of your budget. Pacify any disputes on your credit reports. Determine average interest charges and monthly payments on different car makes and models. Use an online loan calculator to approximate the monthly payments and interest rates according to your credit score and the vehicle you wish to purchase.
- Get pre-approved
Pre-approval refers to filling out forms with banks, lenders or credit unions to infer the rates they can offer. Being approved for an auto loan before going to the dealership grants you negotiating power.
- Time to shop
Once you have finalized the loan, it’s time to look around for your dream car. Use the figures given to you, including the interest rate, monthly payment, amount and loan term.
- Close the deal
Once you find the perfect car, inquire about the financing offer and weigh up with the deals you have already secured. Thoroughly go through all the paperwork and avoid any rush while signing.