Car loans

So now you need a car, but you don’t have enough money to buy one completely. If it’s you, you’re not alone – most Americans don’t have enough cash to buy even a quality car, much less a new one. That’s how they get the loan.

The world of auto loans can be overwhelming when you are first starting out, so it is best to start with a good understanding of the basics. Understanding how a car loan works are the first step in getting a good deal on one.

Auto Loan, Defined

A car loan is almost what you think it is: it is a personal loan, used to buy a car. More specifically, the lender guarantees the lender (you) the money needed to buy the vehicle. In return, the borrower agrees to repay the lender the loan amount plus interest, usually in monthly payments, until the debt is fully paid. Pretty simple, so far.

Often personal credit is a memorable loan. That is, the loan is made solely on the basis of the borrower’s reliability and not secured by some form of collateral.

Car loans are different because they are almost always secured loans, the collateral of which is the car itself. This means that if the borrower fails to make their payments, the vehicle will be returned and sold to pay off the debt.

Four basic building blocks of cars

1. The cost of the loan

There are two basic parts to the cost of a car loan: principal and interest. The main contracted cost is the vehicle itself.

Interest refers to the total amount of expenses incurred during the life of the loan based on the principal and the reported interest rate.

2. Interest rate

The interest rate is the base rate charged to the lender for the borrowed money. The interest rate is usually expressed as a percentage over a one-year period and is known as an annual percentage rate (APR).

3. Payment

The down payment is the amount of money paid by the borrower at the time of purchase of the vehicle. It is usually expressed as a percentage of the total price. It is not a legal requirement when taking out a car loan, but it is almost always required by the lender.

4. Terms and Conditions

This applies to all other items that make up a car loan, including the loan term, usually stated in months or years; insurance and registration requirements; credit repayment and resale terms; maintenance requirements; conditions regarding theft or accident; and the terms of credit and repayment.

There are many other such conditions, and it is good for the borrower to read them carefully and clearly understand what they mean before signing.

Car loan process

Here are five basic steps you’ll probably follow in the process of securing a loan for your new vehicle:

1. Determine what you can do to help

Get out of the paper and create a realistic budget that tells you what you can afford in terms of monthly payments. Then decide how long you are willing to visit your loan – the loan term. Then determine the amount of drop you plan to make. The result will tell you how many cars you can buy.

2. Check your credit score

It is important to know exactly where your credit score stands before talking to your lenders. Borrowers rely on credit reports and results to determine interest rates and loan terms. The higher the credit score, the better position you will be locked into at lower rates.

3. Shop around for the best loan deal

This is important because rates and conditions will vary, sometimes significantly, between lenders. It is also important to ask for the best loan deal before I go to buy a car.

4. Confirm

Getting approved in advance for your credit means you set your boundaries before setting foot in a showroom where your emotions could get the best of you and your pocket money. The best places to look for a pre-approved loan are banks and credit unions.

5. Buy your car

Now is the time to visit your local auto dealers. Find the exact car you want. Then let your borrowers know the year, product, model and vehicle ID. You will also need to buy car insurance as soon as possible.

Most dealers will not let you leave without proving your car insurance.

Two ways to improve your chances of getting an approved car loan

1. Get a co-signer

Is your credit score too low (or nonexistent) to qualify for a decent car loan? The co-signer can change all that. The co-signer puts your name and credit score on the line for your purchase. If you do not pay, their loan will be affected in the same way as if the loan was solely in their name. Typically, a co-signer is a very close relative such as a parent. It is a good way for you to establish credit and make a great credit score.

2. Peer to Peer Auto Loan

Can’t find a co-signer to support you? Several peer-to-peer automatic lending websites are available to assist affiliated lenders and buyers. Your credit score will be triggered and you will be targeted for “high risk” if you have a low or nonexistent rating. The higher the risk of a loan, the higher the interest rate. It is another source of lending whether your credit is good or bad.

Little car loan tips


Be sure to check your lender’s reputation and read the fine print of the loan agreement before signing anything.

And don’t forget to check out the math. Make sure the numbers add up and match the ones you agreed with and with the lender.

One more thing: Refrain from “contingent” or “contingent” credits. There, you sign a loan agreement with a dealer and drive away with a new car before all loan terms are completed.

Important items such as interest rate, repayment period, falls and the amount of your monthly payment can change (almost certainly to your disadvantage) and you could be stuck for much more than you intended.