Understanding How Auto Loans Work
An auto loan is a type of financing used for buying a car. A lender (bank or another financial institution) lends the borrower money to acquire a new or used car and expects repayment with interest. You also usually need to make a downpayment when getting a car loan.
Terms to Know About Auto Loans
Principal Loan: The principal amount is the money financed by the dealership or banks. It's the total amount required to purchase the car. It doesn't include interest and other fees associated with an auto loan. How much money you can borrow depends on your creditworthiness and your financial capacity to pay.
Interest Rate: Usually, a percentage is applied to the principal amount of the loan. How much interest is given depends on the buyer's creditworthiness, the loan term, and the downpayment. Borrowers with a good credit score (670 or higher) may get a lower interest rate. Another way to lower the interest rate is to reduce the loan term, which also means higher monthly payments.
Monthly Payment: This is the amount you'll pay every month until the loan is fully paid. It includes interest rates and other fees.
APR: The APR, or annual percentage rate, includes the other costs associated with getting an auto loan and the interest rates. A higher APR usually means a higher loan amount to be paid back. When choosing a lender, consider the interest rate and the APR to help you better weigh your options.
Downpayment: Lenders usually require a downpayment from the borrowers - about 10% of the vehicle's price. Some lenders may ask for less than 10%, but you may want to consider putting down more. You can reduce your monthly payment and possibly the interest rates by making a larger downpayment. Also, it's easier to pay off a lower loan.
Cosigner: A cosigner is a person willing to share your financial responsibility. If you have a bad credit score, a cosigner may be able to help you get approved for a loan. You may get a lower interest rate if they have a good credit score. Your cosigner can be your significant other, a parent, a sibling, or a friend.
Loan Term: Also called repayment term, the loan term is the number of months or years it takes to fully pay off a loan. For an auto loan, lenders usually offer terms of 2-7 years. If you can afford it, choose a lower term for a lower interest rate. Note that some lenders may also charge termination fees. There may be fees when you pay off a loan before the maturity date. You can avoid this by following the terms of the agreement.
How to Apply for a Car Loan and Get Approved
Before contacting banks, online lenders, or credit unions, visit a dealership first to decide on a vehicle to purchase. After choosing a car, shop around for auto car loans offered by banks and other financial institutions. Find out what documents you must acquire to get approved for the loan. If you need assistance in getting a car loan, feel free to also get in touch with our experts.
Credit Score
You can increase your chances of getting approved by banks and lower your interest rate with a good credit score. Get a copy of your credit report first to determine if you'll get approved for an auto loan. Doing this at least a few months before acquiring a loan gives you more time to fix your credit rating. Make sure to fix errors or disputes to increase your credit score and the chances of getting approved for an auto loan.
If you have a bad credit score, getting approved for a loan through bank financing may be difficult or impossible. Banks are strict in checking the borrower's creditworthiness. They don't usually approve those with lower credit scores.
For those with lower credit scores, the other option is to find in-house financing with a dealership. Talk to us to learn more about this.
Income
Lenders need to know if you have the financial capacity to pay off your loan. They usually ask for income documents such as pay stubs, payslips, or a copy of your income tax return when self-employed. Borrowers with higher monthly incomes may be able to acquire a bigger loan amount. The interest rate may still depend on your creditworthiness, your loan terms, and the downpayment.
Debt-to-Income Ratio
The debt-to-income ratio is your monthly debt payments divided by your income. It's a percentage used by lenders to determine if you're able to pay off another loan. Aim for a debt-to-income ratio of no higher than 50% to increase your chances of getting approved for a loan. Banks are strict with this; you may not get approved when your debt-to-income ratio is 50% or higher.
Who Offers Car Loans?
You can finance a car through direct financing, such as banks, online lenders, and credit unions, or you can get dealer financing. We'll discuss the different ways of acquiring a car loan below.
Direct Lenders
Direct lenders are the banks or credit unions. While they may offer a lower interest rate than other financial institutions, it can be difficult to acquire a loan through a bank as they're strict with the requirements. You need a higher credit score and a good income to get approved for a car loan through the bank. Also, the process usually takes longer. It can take several weeks to get the approval. If you choose banks, get pre-approved to determine if you'll likely be approved for the loan.
Online Lenders
Choosing an online lender for a car loan may be the best option for those with bad credit scores. Unlike banks, online lenders may not do credit checks. You may be approved as long as you can show income documents. Auto loans are usually secured loans, which means that you can use them as collateral for the loan. If you can't pay your dues for several months, the lender can take your car. Online lenders may also be the best way to go if you want faster approval.
In-House Financing
Another option to acquire car financing is through in-house financing, which is a lender that partners with the dealership. You can choose a car and inform the dealership you need financing. They can provide you with a list of lenders. Choose one that offers a lower interest rate, doesn't do credit checks, and offers faster approval.
Contact Mabry Auto Group Today
Are you looking to purchase a brand-new or used car? We offer flexible terms and competitive rates to our clients. Choose a vehicle, and our team will work with you to offer the best options suitable for your budget. Just make sure you fully understand your loan and the repayment process to avoid problems down the road.
Visit our dealerships in Lynchburg or Appomattox to choose a vehicle. We help Charlottesville, Roanoke, and Timberlake drivers find their dream car at an affordable price. Be sure to visit our finance center to inquire about our in-house car loans. Contact us today, and our team will work with you every step of the way, from choosing a car to getting approved for the loan. Get in touch now!
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