How Do Car Loans Work?
How Do Car Loans Work?
If you are in the market for buying a new car, you may be interested in learning about how you can afford that purchase and what financing options you can use. If you have spent some time researching the car buying process, you may be familiar with car loan options. Some of the best auto loans that financial institutions have to offer can make a car buying experience simple and easy.
If you are interested in financing your vehicle through a car loan, you may be wondering how to apply for a car loan or how to qualify for a car loan. Each auto lender offers benefits and requirements that are unique to their financial institution. At Arkansas Federal Credit Union, our members can work with professionals who are dedicated to finding the best car loan for you. We offer a variety of auto loan options to fit your budget. Any resident of Arkansas can become a member to benefit from our auto loan rates.
If you are interested in learning more about the car loans we have to offer, or have questions, feel free to contact us to talk to one of our professionals. We have created a guide to help you understand everything you need to know about car loans.
What’s Included in an Auto Loan?
Like many loans, taking out an auto loan means you are borrowing money from a lender to buy a car. The loan allows you to pay for the car up front and you will typically pay the lender back the loan amount in monthly installments. Additionally, if there is interest added to the auto loan, you will also pay back the amount of interest owed according to the loan terms.
Before choosing a car loan, it is important to know what factors make up an auto loan and how they affect your monthly payments. These factors include:
- Loan Amount: The principle amount, or the amount of money you borrow
- Annual Percentage Rate (APR): The total interest charged to the loan amount
- Loan Term: The period of time you have to pay back the loan
The interest rate and the length of the loan period will depend on the financial institution that you use. Some lenders offer low payments on their auto loans but this can lead you to spending more money over time. It is important to understand how these three factors can impact your overall payment and what to consider for before borrowing.
Save Money On Your Auto Loan
It is important to understand the relationship between your loan amount and the total interest you pay. You may believe that the lower the payment, the better the deal when it comes to auto loans. However, doing the math to figure out what you’re paying and can afford is an important step in choosing a car loan. Lower payments could mean that you are paying more for the value of your car over the lifetime of the auto loan.
If you are looking to save money on your loan, there are practical things to consider before taking out an auto loan. Interest rates on loans could end up costing the most money. There are a few different ways to get a lower interest on your loan that help you save on your bottom dollar.
Check Your Credit Score
Credit plays a key role in applying for loans. Your credit score is one way that lenders will determine the interest rate of your auto loan. If you believe that your credit score is low, examine your credit history to see where you can make improvements before applying for a car loan. Not only does a good credit score increase your approval ratings, but it may also lower the interest rate on your loan.
Those with bad credit history may fall subject to a higher interest rate on their loan. If you are looking to improve your credit to qualify for a better loan, you may make sure there are no errors on your credit report, pay back any missed or late payments, and only apply for the credit you need. Taking steps to maintain your credit can help you get a better deal on your auto loans.
Look for Lower APR
A lower APR may save you money over time. The higher the percentage rate, the more money you may spend on your vehicle. For example, some direct lenders may offer a 3% APR. However, if credit unions like Arkansas Federal Credit Union often offer lower rates, taking the lower APR will save you money on your auto loan. Shopping around for rates can help you get a better deal on your car loan.
The lower the APR the lower your monthly payment will be. If you are curious to see how different APR rates can impact your monthly payment, Arkansas Federal provides you with an auto loan calculator you can use to get an estimate.
Look for Shorter Loan Terms
In the beginning, the longer payment plans for lower monthly payments may seem to be the best route to take. However, this is not always true when it comes to saving money. If you are looking to get the most out of your loan without breaking the bank, you should consider a shorter loan term.
Typically, shorter loan terms will result in smaller total interest for the loan amount. Although your payments may be higher, it won’t collect as much interest. Over time, this saves you more money.
Consider a Down Payment
If you have the ability to put a down payment on your vehicle, you should consider doing so. A down payment not only alters the total price of the car, but it also lowers the amount of loan money you would need to pay it off because you reduce the total loan amount.
For example, your loan amount could differ if you put a down payment on a car. If you are looking to buy a car that costs $30,000 but you offer a down payment of $5,000, the loan amount you need is $25,000. Although it costs $5,000 up front, this is less money that would spend time collecting interest and the total amount you end up paying can be lower.
How Arkansas Federal Credit Union Helps
The biggest benefit of using Arkansas Federal is that our members can work with an auto lending expert who can help you get the best deal possible for you and your family. We offer a variety of loans that fit your financial needs. We also provide you with pricing reports, repayment plans, low interest rates, and assistance along the way.
Additionally, if a new or used auto loan rate isn’t for you, we provide customers with loan refinancing options to get the most out of their previous auto purchase. We understand that an auto loan is not a one-size-fits-all process.
If you are interested in learning more about auto loans or auto refinancing, feel free to Contact us for more information and get our current rate information to find the best auto loan option for your finances.