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How do auto loans work?

how do auto loans work

So how do auto loans work? Since most people buying a new or used car opt for financing it’s an important question, and understanding the answer will help you in the purchase process.

Most auto loans are simple interest loans. Your monthly payment is made up of two important parts: one is principal, the actual amount you borrowed to buy a vehicle; the other is interest, the fee paid to the lender for borrowing the principal.

Payments can include a larger amount of interest at the beginning of the loan and then switch to a larger amount of principal as you get closer to the payoff date.

It’s worth noting that precisely when you make your payments during the course of the month can affect how much principal and interest gets paid. Pay early and more of that payment goes to the principal balance. If you pay on time you’ll pay exactly the amount of interest agreed at signing. Pay late and more of that monthly payment is going towards interest.

The interest, together with any lender fees for providing the loan, get wrapped up into the APR – the annual percentage rate for your loan.

What are your options for getting an auto loan?

Choices include:

  • Dealerships – Offering vehicles and loans under one roof, they’re convenient places for finance but rates may be higher than other options.
  • Banks and credit unions – The opening hours of these brick and mortar premises may not be as convenient as dealerships and online lenders, but they offer low-pressure environments to seek financing.
  • Online lenders – These financial institutions provide both a convenient and low-pressure way to apply for and obtain an auto loan at competitive rates.

Online lender part of Santander Consumer USA, offers several advantages here.

In one quick and easy process, you can apply online whenever it suits you, and receive a decision in seconds. Once approved, print and take your loan packet to a dealership and shop with confidence, knowing your financing is already covered. also offers auto loans to people with bad credit. and with no credit history .

What affects your interest rate?

A major factor is credit score. It informs lenders of how much risk they are taking by lending to you.

Another is the loan term and, generally, shorter loans offer lower interest rates as lenders get their money back quicker. However, a short loan term might mean higher monthly payment.

A vehicle’s age also plays a part. New car loans typically have lower interest rates than those for used cars.

Money down also counts. You can get a lower rate by showing your commitment to the purchase with a sizeable down payment.

Category: Credit

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