What Is a Car Loan? Overview, Meaning & Features

Gone are the days when getting a car loan was a struggle as you needed to do a lot of paperwork. Today, in the era of the digital world, things have changed drastically. With technological advancements, lending practices have changed, thereby, allowing you to get approval for car loans within minutes. Expect a higher interest rate if you’re in the market for a longer-term loan or if your credit score is fair or poor. A shorter loan term or higher credit score means you’ll likely have access to better rates. The lender will also factor in fees, so review the loan’s structure.

A higher credit score increases your loan approval chances at lower interest rates. Applying for Car Loans in advance with the bank is advised to avoid last-minute hassles. With indirect financing, the dealer offers its own financing through its lending partners. You work with the dealer to fill out your auto loan application, which the dealer then sends to a lender or lenders. Keep in mind that increasing the principal typically means you’ll pay more in interest over the life of the loan. Also, not all lenders offer cash-out auto refinance loans, so you’ll need to do some legwork to find a lender who can lend a helping hand.

Key terms to know when getting a car loan

It is possible to purchase a car with cash, of course, if you can come up with the money. You can also explore the possibility of buying a car with a personal loan or leasing a vehicle rather than buying one. Regardless of why you are exploring auto loans, you can get pre-approved for a car loan to compare your options and choose the best one for you. Direct financing is when you obtain auto financing through a lender outside the dealership.

Qualifying for one of these might make accepting an in-house loan worth it—but be sure to understand the terms and requirements before signing on the dotted line. This is how much you’re required to pay each month toward an auto loan. A portion of your monthly payment will go toward your principal while the rest will be applied to the interest. A car loan is a type of installment loan used to purchase a vehicle.

Today, almost every significant bank and other such intuitions provide car loans at favourable interest rates that vary between 7.5% to 10% per annum. If an auto loan is the best option, then compare rates from various lenders such as a local bank, credit union, insurance company, and online lenders. To get an accurate idea of rates, you will need to know what your credit score is and how that will affect rates. Check your credit history from one of the three free credit reporting companies by going to AnnualCreditReport.com. Given the high prices of cars today, many people need to take out an auto loan to finance the purchase. Before you apply for a loan, consider whether you can afford the monthly payments and how they will affect your overall budget.

What Do Potential Car Buyers Need to Take Into Account Aside from Loan Payments?

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. Auto Loans come with minimal processing fees and documentation requirements, making the entire loan application process easier. Learning about the workings of these loans is important to understand them better. Some of the coverage options or discounts listed in this article may not be available in your state. Check with the insurance company to find out what’s available to you.

A cash-out refinance loan is similar to traditional refinancing but lets you convert your car’s equity, or the difference between the value and what you owe, into cash. You’ll replace your current loan with a new one that includes the equity you borrowed. Make sure you understand the differences between the various types of auto loans so you can choose one that best suits your needs and financial goals. Think about how much you may be able to afford toward a what is auto loan down payment and decide if you want to trade in a vehicle to help lower the total cost of the loan. And if you might be interested in optional add-ons like service contracts, credit insurance or extended warranties, research how these can affect the total cost of your loan.

1. Also, not all lenders offer cash-out auto refinance loans, so you’ll need to do some legwork to find a lender who can lend a helping hand.
2. For example, if you buy a new vehicle and finance all of it at $30,000 and get in an accident one year later, you may owe more on the vehicle than it is now worth after depreciation.
3. Depending on the financing arrangement, you may also be required to make a down payment.
4. Banking services provided by Community Federal Savings Bank, Member FDIC.

Car Loan Terms to Know

But remember that missed payments could result in your car being repossessed. And, crucially, the loan would still be in your name, which means the default would also belong to you. This is your total loan amount—how much you’ll actually pay for your vehicle over the life of the loan. Though the eligibility criteria to get a car loan varies from lender to lender, here are certain things you must fulfil to obtain the funds. Also, anonymous tips can be filed by current or former employees or industry insiders if they believe a violation of consumer finance laws is occurring. Consumers can also use the consumer complaint database of consumer financial products, and search by state, product, issue, ZIP code, or company name.

Most require good to excellent credit to get approved—a good credit score is usually considered to be 670 or higher. There are also several lenders that provide loans for borrowers with bad credit, but these typically come with higher interest rates compared to good-credit loans. The lender funds these loans, so you won’t have to go through a dealer. Generally, expect to wait between one business day and a week to get a loan from a bank or credit union.

Your monthly payment will depend on the amount of the loan, the loan term and the amount of interest you’ll have to pay over the course of the loan. To qualify for a good interest rate, you’ll typically need good to excellent credit. A car loan is an agreement between the lender and you, the borrower, allowing you to borrow money for an agreed-upon term to purchase a vehicle.

Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. A car loan can help make buying a vehicle more affordable by breaking up the cost into monthly payments over a period of time. Auto loans generally range from a few thousand dollars up to $100,000 or more.

However, dealer financing tends to come with a higher interest rate. Dealers often take a commission or markup when they match you with financing from a bank or credit union. The type that’s best for you depends on factors like your credit score, the loan amount and the vehicle you want.