An Auto Loan is a type of secured loan that is used to purchase a vehicle. Like all loans, it comes with the risk that if you fail to make your payments on time, you could lose ownership of the vehicle. As a result, many lenders require good to excellent credit for individuals to qualify for an Auto Loan. Individuals who have poor credit may be able to get an Auto Loan by using a cosigner or applying through a lender that specializes in subprime lending.
Getting an Auto Loan typically begins with a borrower submitting an application to a bank or credit union. During this process, the lender reviews the borrower’s credit and income to determine if they can comfortably afford a car loan. Lenders also use this information to set the interest rate on the loan.
The borrower then shops around for the best Auto Loan terms and rates. Often, lenders advertise their auto loan rates by annual percentage rate (APR), which includes both the interest and any other fees associated with the loan. As you compare auto loan options, it’s important to understand that a longer repayment term will result in higher total borrowing costs than a shorter term, even if the monthly payments are similar.
Most people buy cars with help from Auto Loans, but you can also buy a car outright and pay no interest at all by saving for a large down payment or using cash. Some people choose to take out an Auto Loan instead of buying a car with their own money because it can be easier and more convenient.
When deciding whether or not an Auto Loan is right for you, consider your financial situation, including other debt payments you may have and other fixed expenses. Generally speaking, you’ll want to avoid spending more than 20% of your monthly income on car payments.
Before you apply for an Auto Loan, research lenders online and find the one that offers the most competitive rates for your specific circumstances. Many lenders offer preapproval, which allows borrowers to see personalized rates after supplying basic information and agreeing to a soft credit inquiry that does not impact the borrower’s credit score. Additionally, some banks and credit unions provide auto loan services directly to their customers and can provide a more personalized experience without the pressure of car dealerships.