Auto loans can be a massive headache, and it's no wonder why. With auto loans, there are countless decisions to make: should you finance or buy? Should you lease or buy? What type of auto loan do you need (new auto loan vs. used auto loan)? Do you qualify for an auto loan at all? These questions may have been running through your mind when you started looking into financing options for your next vehicle purchase. If so, read on to learn what you need to know about car loans and how to prepare yourself best when applying for them.
What Are Car Loans?
Auto loans, or car loans, are a great alternative when you cannot purchase a car in total cash or if you want to invest in a new car, but it is expensive. When you obtain an auto loan, you borrow money from a lender to purchase a car. You agree to repay the funds plus any fees and interest accrued over a specified period.
How Do They Work?
Before we get into the specifics of how car loans work, let's take a moment to familiarize ourselves with some of the most common terms you may come across as you research loan options.
- Annual percentage rate — (APR) — The annual percentage rate (APR) is the amount you'll pay to borrow money, including interest and fees, expressed as a yearly percentage. The greater the APR, the more you will owe in exchange for the loan.
- Down payment — This is an upfront payment made toward the cost of the car. It could be cash, the value of a trade-in vehicle, or both. The down payment reduces the total amount you need to finance, resulting in lower monthly payments.
- Loan term — This is the amount of time you'll have to pay off your loan. It's also known as the loan duration. Keep in mind that the longer your loan term, the more interest you're likely to pay.
- Monthly payment — The amount you owe each month is referred to as your monthly payment. It is made up of principal, interest, and any other fees that may apply.
- Principal — This is the amount borrowed, fewer fees, penalties, interest, and other costs.
- Total cost refers to the total loan amount, or total principal and interest, that you will pay throughout your car loan.
Loan payments are made to the lender monthly on a car loan. Your monthly payment will be determined by the loan amount, the loan term, and the amount of interest you must pay over the life of the loan.
Your loan contract specifies the loan's principal and interest rate, as well as any optional add-ons.
Loans That Are Most Commonly Used
Auto loans are the most common type of loan used in purchasing vehicles. Auto finance companies offer financing options to applicants with various credit histories and personal circumstances.
The auto loans you get will depend on your financial situation, such as how much money you make or your credit. You may want assistance from someone in Easy Solutions and credit repair for these kinds of consultations or perhaps to monitor your credit score.
A car loan can be used to buy a new or used vehicle. You can also apply for a loan to purchase a lease or to refinance an existing loan. New-vehicle loans may have lower interest rates than used-car loans and may come with special incentives.
Who Issues Auto Loans?
Typically, auto loans are issued by dealers or banks. Another place to get an auto loan is through Easy Solutions and credit repair specialists. Your dealer can help you understand the purchase options available in your area for buying a car with financing terms that best suit your budget.
- Direct lending — Banks, credit unions, and other financial institutions, such as online lenders, are examples of direct lenders. Borrowing from one of these lenders allows you to comparison shop for the best loan terms for you, and you may be able to get preapproved for a specific loan before you shop. When you're ready to buy, you'll use this loan to cover the cost of the vehicle.
- Dealership financing — Your dealer's finance department allows you to shop for both your vehicle and your auto loan in one location. Because dealers usually have relationships with multiple lenders, you may be able to compare terms and even qualify for a manufacturer-sponsored low rate or incentive programs. However, beware of "buy here, pay here" dealerships that offer high-interest in-house auto loans to buyers with poor credit.
Requirements for obtaining a car loan
To get a car loan, you'll usually need to fill out a loan application that includes information about your financial situation. To make the process go as smoothly as possible, you'll probably need the following information on hand:
- Number of Social Security
- Current and previous addresses
- Information on current and previous employment
- Total income and sources of income
- Details on any other debts you may have
For borrowers with low credit scores, the lender will factor in other information such as:
Your net income compared to your total monthly debt obligations
The value of any assets you have available for use if needed. The more liquid these are--meaning that they can be converted into cash without losing too much of their market value--the better off you are in receiving an auto loan. The approval chances go up!
Your credit score is essential when looking for an auto loan. If you have a low credit score, it may be harder to get approved by lenders and charge higher interest rates on the loans. This means that if your car needs repairs or maintenance, there's even more of a chance that you might have trouble paying back what you owe to both lenders and the mechanics.
Auto loans are essential to know about. It's always good practice to keep track of your loan and how much it will cost you in the long run. This information is also valuable for budgeting purposes, seeing what kinds of expenses might be coming up that may require extra funds or money saved away just in case something happens not according to plan.
What Happens If I Fall Behind on My Payments?
If you've fallen behind, here are some alternatives to defaulting on your payments.
- Speak with your lender. You may be able to request an extension on your due date, as well as a payment extension or deferral.
- See if you can come up with a payment plan.
- Refinance the loan at a lower interest rate if possible.
You may be eligible for a loan workout or temporary hardship assistance.
In the event of default, some lenders offer repayment programs to help you get back on track with your payments and avoid future delinquency.
Missed payments can result in the repossession of your vehicle. And most importantly, if you are the only one in which the loan's name is, it would remain in your name even after default.
The outcome isn't just about having the car taken away either; there are also severe repercussions when dealing with credit scores, mainly because accounts become delinquent. Issues such as car ownership come into question, meaning that you may not qualify for loans or financial assistance in the future if you fall behind on payments.
Examine your credit scores and monthly budget to see if you can afford a monthly car payment. If your credit isn't great, you might want to apply with a co-signer or look into lenders who work with low-credit borrowers.
How Easy Solutions Can Help
Easy Solutions is here every step of the way so you can hit your financial goals and achieve success! We provide an array of services that ensures that if you ever hit roadblocks on your journey, our credit repair services and financial consulting provide Easy Solutions for your needs.