Financing Your Auto: Car Loan Fundamentals

Finding an auto car loan requires some diligence and effort on your part to ensure that you are obtaining the most competitive interest rate and the best terms possible. There are many choices available for funding your loan, from online lenders to your bank to the dealership finance office. Your approach should be motivated by finding the best overall loan that meets your needs.

Types of Auto Loans

Whether you seek an auto loan from a bank, a dealership, or a credit union, there are several different options. Shop around to find the best interest rate being offered, and do the math to determine if special incentive offers from dealership lenders will really save you money. You can obtain auto loans for the following types of purchases:

  • dealer purchases

  • private party purchases

  • lease buyouts

  • refinances
Loan Costs

Unlike mortgage loans, where you can save interest by paying the note early or paying additional dollars into the principal, auto car loans are calculated with simple interest. On a simple interest loan, your payment is determined based on applying the APR to the purchase price and determining the monthly payment by dividing that total over the number of months of the loan agreement. A lower interest rate not only means a lower monthly payment, but also that more of each monthly payment is applied to the principal loan.

While many dealerships now offer extended repayment periods of 60 - 72 months or more, it is advisable to keep your loan repayment period at 36 - 48 months.

Applying for an Auto Loan

To apply for an auto loan, you will be required to complete a credit application. The application will request personal information as well as information about your income and debt. The lender or broker will also pull a credit report to determine your credit rating. Interest rates will be higher if your credit is poor, so be aware of your credit rating before negotiating a loan.

Always be completely honest on your loan application; often the lender will require verification of the information, such as check stubs to verify income. Most lenders will be able to give you a decision within a very short period of time about your approval. Do not be discouraged if you have poor credit; there are many auto loan programs available to help. Lenders consider more than just your credit score, too; your longevity with your job, your amount of existing debt, and your income will also be considered when determining your eligibility for an auto car loan.

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