Auto Loans
An auto loan is a type of secured loan for purchasing a car or other vehicle. The vehicle itself serves as collateral for the loan and can be repossessed by the lender if the borrower defaults.
Some auto loans require no down payment, but experts often recommend making a down payment of 10% to 20% of the car’s value.1 That will reduce the amount you have to borrow (and eventually pay back) as well as the interest you’ll pay over the course of the loan. Some lenders may also offer you a lower interest rate in return for a higher down payment.
Auto loans are widely available from banks, credit unions, online lenders, and car dealerships.
Factors to Consider When Getting an Auto Loan
01 Credit score
Your credit score will impact the interest rates that lenders offer. The higher your credit score the more likely you will be to receive loan offers with good interest rates.
02 Feature
While you do not necessarily have to make a down payment to qualify for an auto loan, doing so could lower your interest rate, monthly payments, and total loan cost.
03 Terms and conditions
It is important to understand all of the terms and conditions of your loan, including:
04 Principal
The principal is the amount of money you’re borrowing. Lenders will use this figure to calculate your interest and fees. In a typical, amortized auto loan, each of your monthly payments will pay off a portion of the principal along with interest.
05 APR and interest rate
The terms annual percentage rate (APR) and interest rate are often used interchangeably, but there are some important differences. The interest rate is simply the rate you’re charged on the principle, while APR also includes any other fees and costs associated with the loan. To fairly compare different loans, use their APRs.
06 Loan repayment period
Lenders may offer you loans with a variety of repayment periods, typically ranging from 36 to 72 months, although shorter and longer repayment terms are sometimes available. In general, the longer the repayment period, the lower your monthly payments will be, but the more you’ll pay in total over the life of the loan.
07 Prepayment penalties
Some lenders charge prepayment penalties if you pay the loan back before the date it would normally have come to an end.
08 Other fees and charges
Auto loans can have additional fees, such as an origination fee and a loan processing fee, all of which should be spelled out in the contract.
09 Total cost of the loan
This is how much you will have paid for the car when all is said and done, including the down payment, monthly payments, and any fees.