Everything You Need to Know About How Car Loans Work

Everything You Need to Know About How Car Loans Work

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Purchasing a vehicle is a significant investment. In 2021, the average price of a new car is around $40,000, and used ones are not far behind at $25,000. For most, that means needing to pay for a vehicle over time rather than upfront. 

Auto loans, which let buyers pay for vehicles in installments, are the most common way for people to get behind the wheel while spreading out its cost over time.

However, car loans aren't all the same and, depending on several factors, can widely vary in their terms and cost to you over the long haul.

That's why even though the price is usually seen as the most important figure in an auto purchase, finding the best car loan for you can be equally important.

How do car loans work? Let's explore car loans in detail and the multiple terms you'll need to know to secure the best one.

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What is a car loan?

A car loan is a sum of money provided to you by a lender, which you promise to pay back over a set period. This arrangement lets you drive away in the vehicle you want and takes some of the immediate hit off your bank account, allowing you to make payments gradually.

But car loans aren't as simple as asking for an amount of money, receiving it, and paying it back. Car loan terms like interest, down payment, term length, and monthly payment differ from buyer to buyer and largely depend on their credit reports.

The down payment is the upfront amount of money you present at the time of purchase. The down payment lowers the total sum you'll need to borrow and consequently means smaller monthly payments over a set period of months. A down payment can also lower your interest rate and reassure lenders you're a reliable borrower.

The interest rate on a car loan is the percentage of the total borrowed or principal you'll pay over the loan term. Though an interest rate may seem like a small percentage of the loan amount you borrow, it can significantly add to the sum of your purchase on lengthy loan terms.

The term of a car loan gives you a set number of months to pay back the principal and interest. Term lengths vary, usually ranging from 24 months to 84 months. Per a given amount borrowed, loans with longer terms will offer lower monthly payments, but they are more expensive over the long haul when you take interest into account. 

The monthly car payment is simply the amount you owe each month to pay back your car loan. Loan payments are a combination of principal and interest and are lower when you go with a loan over a more extended period. However, longer-term car loans also mean extra interest payments, so they're more expensive over the long haul. 

Applying for a car loan is a time-consuming process and a hassle. Wouldn't it be nice if you knew someone who could take care of the details for you? Shift does just that, working with a network of trusted lenders to secure you the best deal on financing.

Car loan interest rate and APR

When looking for the car loan that works best for you, the interest rate is essential.

The interest rate, or the percentage charged per the amount you borrow, can significantly affect what you owe during the loan.

The main element that affects the interest rate you'll receive from a lender is your credit score. Lenders are looking for borrowers they can trust and who've shown consistency and reliability over the years when meeting financial obligations. Before you apply for a loan, it's wise to determine your credit score and take care of any outstanding obligations to convince lenders of your suitability. 

But while the interest rate is an excellent figure to know in assessing your loan options, the annual percentage rate, or APR, is even more critical. APR, also expressed as a percentage, takes into account not only the interest rate on a car loan but also includes any applicable fees, so you know just how much you'll owe. 

Looking for financing but worried about credit checks and a lengthy wait? Shift has easy loan applications and they work with a network of trusted lenders, so you get the best rate. When you choose to finance with Shift, you’ll drive away in your new car quickly and easily. 

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Applying for a car loan

Applying for a car loan is a detailed process, and there are steps you can take to smooth out the process. No matter where you apply for a car loan, it's good to plan ahead of time to get an idea of for which terms you'll qualify. And when the time comes to apply, you'll have to provide comprehensive financial information to gain trust from a lender. 

Obtaining your credit report from one of the major credit reporting bureaus, like Experian or Equifax, gives you a clearer picture of where you'll stand with lenders. The terms you're awarded by lenders largely depend on these reports, so it's good to check them over in detail and try to fix any discrepancies. 

Seeking pre-approval on a car loan is another step you can take to ease the process of obtaining financing. With pre-approval, a lender researches your financial history in detail, performing a hard credit pull. At the end of the process, you'll know the loan terms you qualify for, which you'll likely be able to take advantage of when you purchase a vehicle.

The convenient thing about pre-approval is an agreement binds neither party, so you're free to explore other options if you choose. 

By taking these steps, when you approach a lender to apply, you'll know your financial situation in detail and be prepared for what terms to expect. 

When you require financing on your next used vehicle purchase, look no further than Shift. When you apply for financing with Shift, it’s free of cost, obligation, or hidden fees. You can apply with confidence when you choose Shift. 

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Car loans in summary

Auto loans are an often overlooked aspect of car buying, and they can save you money in the long term when you pay attention to the details. Finding the best combination of down payment, interest rate, and term length can not only ease the strain on your wallet month after month but can also help you drive away in the vehicle you want. 

When you need to finance, Shift makes it easy. No matter what type of vehicle you’re buying, whether an electric car or pickup truck, Shift has the loan for you. Most customers who apply for financing with Shift receive a loan offer within minutes. Shift works hard to reduce the work you need to do. And should you need help navigating the auto loan application process, you’ll receive one on one attention, so you obtain the financing you need. No matter the loan amount or monthly payment that fits your budget, Shift is there to guide you every step of the way.

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Author
Shift Editorial Team