Everything You Need to Know About Applying for a Car Loan

Everything You Need to Know About Applying for a Car Loan

Every day, at least 115 million cars hit American streets. With more than 76 percent of Americans driving alone to work each day, and an additional 9 percent carpooling, cars are a must-have item for most Americans.

But a quality car doesn’t come cheap, whether you’re considering a new one or a used alternative. For many Americans, a car is the second biggest investment in their lifetime, after a home. 

Thankfully, there are other ways to finance a car purchase. One of them is by taking a car loan

But exactly what is a car loan? Where can you get one? Why should you consider taking one, and how can you go about the process?

If you’re asking these questions, you’ve come to the right place. In this comprehensive guide, we tell you all you need to know about car loans.

What Is a Car Loan?

Also known as an auto loan, a car loan refers to a personal loan that’s meant for financing a car purchase. More specifically, lenders loan aspiring car owners the amount of money needed to purchase a car. In return, the borrower agrees to pay back the loan plus interest. 

Usually, the borrower will make monthly payments until they pay off all the money they owe.

In most cases, a personal loan is unsecured. That means that the lender makes the loan based on your creditworthiness as opposed to collateral. Generally, credit cards are unsecured loans. 

What makes car loans different from most other car loans is that it’s a secured loan, with the vehicle itself acting as collateral. If the borrower fails to make their payments for some reason, the lender can repossess it and sell it to pay off the debt.

Essential Aspects of a Car Loan

Like most other loans, a car loan has four factors that first-time auto loan buyers need to consider before signing the contract. Let’s look at each of these factors closely.

Loan Costs

An auto loan has two major parts. The first is the principal, which is the actual cost of the car itself. The other part is the interest, which is the cost the loan accrues over its lifetime based on the principal amount as well as the interest rate offered by the lender. 

Besides the costs above, you’ll also incur other fees, including title costs and taxes. You may also have to pay origination fees and delivery charges, which are negotiable. 

Interest Rate

Interest rates are basic charges that the lender charges for the money they loan you. Auto loans can show two different rates:

  • Interest rate
  • Annual percentage rate (APR)

The interest rate, also known as the nominal interest rate, refers to the advertised rate that’s used when you’re calculating the interest expense on your loan. For instance, if you’re considering a car loan of $20,000 with an interest loan of 6 percent, your annual interest expense will amount to $1200, or a monthly payment of $100.

Annual percentage rates generally include fees that are associated with the car loan. These may include loan broker fees, origination fees, and so on. An APR is often expressed as a percentage and is typically equal to or greater than the nominal interest rate.

When shopping for a car loan, it’s best to compare APR rates as they provide a more accurate picture of the true cost of financing. That’s because the APR takes into account all other costs associated with procuring the car loan.

Down Payment

Many loans require the borrower to put down an upfront payment, which is a percentage of the total cost of the item they’re purchasing. This upfront payment is called a down payment. 

So, how much should you put down as a down payment? The recommended amount is 20 percent of the car’s sticker price. Keep in mind that the more money you pay as a down payment, the less you’ll need to borrow. 

Terms and Conditions

Terms and conditions refer to other essential items that are associated with the car loan. One of them is the loan term, which is typically stated in terms of months or years. Other items included in the terms and conditions of a loan include:

  • Car insurance
  • Registration requirements
  • Maintenance terms
  • Loan payoff requirements
  • Resale conditions
  • Car maintenance terms
  • Theft and accident conditions
  • Loan default and repossession terms

It’s important to read and understand these terms and conditions before you sign on the dotted line.

Where Can You Apply for a Car Loan?

Many car buyers dedicate a significant amount of time to finding the right car for them. Most scour different sites looking for a car that’ll serve them well. But many of these car buyers don’t do the same when shopping for financing.

Many car buyers simply opt for the financing option that the car dealership provides. There are certainly many benefits of doing so, including the obvious convenience that comes with this option. 

But there are other places you can get car loans. In recent years, a multitude of online auto loan lenders have entered the scene, and these are worth checking out too. 

You can also consider conventional lending institutions, such as credit unions and banks. The ultimate goal is to work with a lender who offers the best terms and most competitive rates.

The Auto Loan Process

If this is your first time applying for a car loan, it helps to understand how the process goes to make things easier for you. Here’s a step-by-step guide you can follow.

Start by Determining How Much You Can Pay

The first and most important step of the car loan process is setting a realistic budget. You’re going to be making monthly payments for a considerable amount of time, possibly a 60 month period. You want to make sure you can comfortably make these payments throughout the life of the loan. 

Take ongoing costs into consideration too. These include maintenance, gas, and insurance. Don’t forget to factor in the down payment you’re planning to make.

Check Your Credit Score

Many car buyers overlook this essential part of the car loan application process. Almost all kinds of personal financing will involve pulling your credit report. Simply put, your credit rating can determine whether you’ll get pre-approved for a loan or not. 

People with excellent credit generally get approved quickly and enjoy the lowest rates. 

There are reputable sites that allow you to access your credit score. You can also access your credit score directly from credit bureaus. 

What if you have bad credit? Well, there are ways to improve it and get approved in the future. Besides, some lenders may still be willing to listen to you, although the interest rate will most likely be higher.  

Compare Loan Rates

Car loan rates can vary considerably. That’s why you shouldn’t go with the first offer that you get. 

Ideally, you should get quotes from multiple lenders. Compare these offers before making a decision. 

Some of the features to weigh up include:

  • The interest rate, both the advertised and the comparison rate
  • Loan fees, including application fee, early exit fee, and monthly charges
  • Loan terms, which usually range between one to seven years
  • Lender type, for instance, dealership, bank, non-bank, car manufacturer, and peer-to-peer lender

By looking at these features keenly, you can make a more accurate decision when it comes to choosing the best loan option for you.

Apply for a Loan Pre-Approval

This step is optional in the auto loan process, but that doesn’t mean it’s not helpful. A pre-approval means that a lender has agreed to lend you a certain amount of money before you buy a car. Either party can still back out if they change their mind before the full approval.

Your prospective lender will still need to assess your financial condition before they pre-approve you for a loan. Keep in mind that getting pre-approved is no guarantee that you’ll get the loan, but it’s a good sign.

Once pre-approved for a loan, you have a good idea of what you can really afford. With this knowledge, car buyers can approach dealerships more confidently and without the worry that they’ll overstretch their budget.

Shop for a Car 

Now that you’ve been preapproved for a loan and know how much you can afford, it’s time to find your car. Visit different auto dealers and find the right car for you. 

After you’ve identified the car of your dreams, inform your lender of its make, model, year, and Vehicle Identification Number. You may need to buy auto insurance right away as some dealers don’t allow you to drive away without proof of auto insurance.

Get Your Car Loan Without a Hassle

Buying a car is a huge decision, and you want to get everything right. One of the most important steps in this process is getting a car loan that you won’t regret. By arming yourself with enough research on auto loans, you can make the right choices from the start.

Are you interested in reliable car financing options? Apply for a car loan with us today.