Anatomy of a Car Loan

If you’re a first time car buyer, chances are good that you’ll need an auto loan in order to finalize the purchase of your vehicle. The car buying experience is stressful enough, and the process of applying for a loan adds more on top of that, in large part because there is so much uncertainty.

To help ease the process, it is best to educate yourself on the specifics of auto loans. Once you’ve done that, you’ll feel much more comfortable when it comes time to seek approval from a lender. The more you know, the less chance there is for potential confusion.

Down Payment

Down payments are not a requirement, but not doing so can affect your chances of being approved for an auto loan. 10 percent of the vehicle’s total cost is often considered the minimum. But the suggested amount is closer to 20 percent of the vehicle’s total cost. In general, the higher the down payment, the better your chances are of being approved. Doing so also lowers the total amount of the auto loan that will need to be paid off.

Vehicle Trade-In

Trading in your current vehicle can be a huge benefit to your auto loan, unless you are determined to sell it on your own. The dealership can at least assess the cash value of your vehicle, and you are at no obligation to trade it in after their assessment. But if you are satisfied with their assessment, it could reduce the total cost of your new vehicle.

Interest Rate

The interest rate is the percent of the principal loan — this is how the lenders profit from your loan. Your credit history is a significant factor in how your interest rate will be. The better your credit history, the more likely you are to receive a lower interest rate.

Term of a Loan

This is the length of your auto loan. Simply put, it is how long you will have to pay off the total cost of your loan. Best practices suggest that your auto loan be between three and four years. The longer your loan term, the more that loan accrues interest, which can up your total long-term costs.

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