According to a recent report, about 85% of the new cars that are sold every year are financed. In order to buy these cars, people have to find a car loan provider, look through the different types of loans they offer, and commit to making monthly loan payments to drive their new vehicles home. All of this might lead you to believe that all Americans know everything there is to know about car loans. But in reality, this couldn’t be further from the truth. Many people are unaware of how they work. So, how do car loans work?
That’s what we’re going to discuss today so that you’re aware of what you’ll need to do to take out a car loan in the future. We’ll touch on everything from getting pre-approved for car loans to tracking down the best possible car loan terms.
Check out our complete guide on car loans for new shoppers below and make sure you put it to good use.
You Begin by Applying for a Car Loan
Far too often, people make the mistake of shopping around for cars before they know how large a car loan they’ll be able to get. You should avoid doing this if at all possible.
There is nothing wrong with casually shopping around for a car when you’re in the market prior to getting approved for a car loan. But you don’t want to fall in love with a car, test drive it, and be sitting in a dealership ready to buy it before you have a loan in place.
If you know that you’re going to need to borrow money to buy a car, you should get pre-approved for car loans in advance. You can usually do this within a matter of just a few minutes online. Some auto loan lenders will let you know if you’re approved for a loan within just a minute or two after you fill out an online application.
You See How Much Money You’re Qualified to Borrow to Buy a Car
After you fill out an online application for a car loan, a lender will reveal whether or not they’re going to approve you. They’ll also let you know how much money they would be willing to lend to you.
This is why you should try to apply for a car loan before you begin seriously shopping for a new vehicle. It’ll give you a much better idea of what your budget for buying a car should be.
You won’t have to worry about wasting your time shopping for cars that you can’t actually afford when you take this approach to getting a car loan. It’ll allow you to enjoy a much better experience overall when it comes to car shopping.
You Check Out the Car Loan Terms You’re Offered
In addition to letting you know how much money you can borrow when buying a car, a lender will also typically lay out some car loan terms for you after approving you for a loan. They’ll tell you what interest rate they’ll provide for you when giving you a loan and let you know how soon they would expect you to repay a loan.
You should not just gloss over the car loan terms that a lender sends to you. If you do, you might end up paying way too much money over the life of a loan. You should instead look closely at these terms and compare them to the terms that other lenders will offer to you.
You Decide How Long You’d Like to Take to Pay Off a Car Loan
More often than not, a lender is going to tell you how long you’ll have to repay a car loan when they send you the terms for it. But you should know that there is going to be some flexibility in this department.
The average car loan lasts for about six years these days. But if you would like, you can also choose to repay a car loan sooner than that. There are some lenders that will provide people with car loans that last for just three or four years.
You might also have the option to extend a car loan beyond the six-year mark. Some lenders are offering seven-year and even eight-year repayment plans in some cases. It would be well worth exploring all your available options so that you can pick one that will fit into your budget.
You Search for a Car That Fits Into Your Price Range
If you’re going to be buying a brand-new car for yourself, it’s likely going to cost a pretty penny. The average new car comes in at right around $47,000 nowadays.
But you can choose exactly what you’re willing to spend on a new car based on the amount of money that you were approved to borrow for one. In some instances, you might have to shop for a car that will cost well under $47,000. But in others, you can stretch your budget further and shop for a car that will cost over $50,000.
It all depends on how much money you get approved for when you first apply for a car loan. It’s going to determine what your budget will need to be, though you’re always welcome to borrow less than you were approved for if you would like.
You Lock In the Interest Rate for a Car Loan
When you first apply for a car loan, a lender is going to tell you what your interest rate on the loan will be while providing you with your car loan terms. But it’s worth noting that this interest rate may fluctuate a little bit until you lock it in.
To avoid having your interest rate go up, you should start shopping for a car ASAP, pick out one that you like, and then lock your interest rate in. You won’t have to be concerned about your interest rate going up anymore once you have your rate locked in and all ready to go.
You Choose Whether or Not to Put Down a Downpayment
When a lender initially sets you up with car loan terms, they’ll tell you how much your monthly loan payments will be. This number will often be based on you not putting down a downpayment.
But if you would like, you can reduce your monthly loan payments by putting down a downpayment on a vehicle. Even if you only put down, say, $1,000, it’ll make a pretty big difference in the price you’ll pay to a lender every month.
For this reason, you should give some serious thought to potentially putting down a downpayment on a vehicle if you can afford to do it. It’ll make it easier for you to pay for your car every month.
You Buy a Car and Start Making Monthly Loan Payments on It
Once you get to this point, you won’t be asking yourself the question, “How do car loans work?”, anymore. You’ll just about be ready to drive a car off the lot so that you can start enjoying it.
Before you do this, though, you’ll need to officially purchase the vehicle that you have your eye on. This will involve filling out a bunch of paperwork and promising to repay the car loan that you’re taking out.
From there, you can get behind the wheel of your new car and begin driving it around. But it’ll be important for you to remember that repaying your car loan will be of the utmost importance.
If you fail to pay back a car loan, it could lead to your vehicle getting repossessed at some point. It could also lead to your credit score taking a huge hit.
But as long as you’ve done everything that we’ve discussed here, repaying your car loan shouldn’t be a problem at all. You’ll be able to get on the right track right away so that you can have your car loan paid off in a timely fashion.
Stop Asking “How Do Car Loans Work?” and Start Looking For One
Most people don’t have the means to pay for a new car in cash. Not everyone has an extra $40,000 (or more!) sitting in their bank account.
But that doesn’t mean you can’t purchase a new car if you want to. By finding out the answer to the question, “How do car loans work?”, you can get the job done.
Start looking around for a car loan today so that you can buy a new vehicle. It shouldn’t take you too long at all to find one.
Contact us now to get more information on taking out a car loan.