Beginner’s Guide to Auto Loans

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Purchasing a new or used car may just be one of the biggest purchases you make in your lifetime. With all the aspects that you need to consider when getting a loan, figuring out the right loan to get can get your head spinning. That’s why we’ve put together this guide to auto loans, to help you pick the best loan for you.

What Is an Auto Loan?

If you don’t have the cash to pay for a car you intend to purchase, an auto loan can help you buy it – regardless of whether the car is brand new or used. Car buyers get auto loans from financial institutions like banks, credit unions, online lenders, etc. When you get a loan, you agree to repay the borrowed funds over a set period of time, with the interest.

Important Terms to Know

Annual percentage rate — This is the amount you will pay to borrow the money, including the interest rate and any fees, given as an annual percentage. The higher the APR, the more you will owe in return to the lender for the loan.

Down payment — This is what you pay upfront toward the cost of the vehicle. It can be cash, the value of a vehicle you are trading in, or both. The down payment will help you lower the overall amount that you need to finance — which can mean lower monthly payments for you.

Loan term — Also called loan tenure or duration, this is the length of time within which you’ll have to pay off your loan. Keep in mind that the longer your loan duration, the more you will have to pay in interest.

Monthly payment — The monthly payment is what you owe each month. It’s made up of principal, interest, and any other fees that may be applicable

Principal — This is the amount that you are borrowing from the lender minus interest, fees, penalties, and other costs.

Total cost — This sum indicates the total loan amount that you will be paying over the course of the loan term.