How Does a Car Loan Work?
Buying a car is a big financial responsibility, and most Americans choose to take out a car loan to complete the purchase. More than 85% of new cars are financed, while only 55.5% of used cars are financed, making car loans extremely common. Car loans are typically easy to secure, and you can often get one directly from the dealership, making it a convenient and hassle-free method of purchasing a new Chevy vehicle. But what exactly is a car loan, and how do car loans work? At Johnson Family Chevrolet in Woodlawn, Virginia, we’re here to help break down the process.
What Is a Car Loan?
A car loan is a loan for when you want to purchase a car but don’t have enough cash to pay the full price upfront. You have to repay the loan in fixed installments over a certain time frame according to the loan’s terms, including interest.
Those with higher credit scores will usually receive better interest rates, meaning you’ll pay less for the loan than someone with a lower credit score. If you have a lower credit score, lenders will see you as a higher risk of neglecting to pay back the loan, hence the higher interest rate.
You can get a car loan through several providers, including with a car dealership, bank, or credit union. Different places may offer you different interest rates, so it’s in your best interest to shop around. Even small variances in your interest rate can result in a substantial difference in how much money you pay back over the life of your loan.
How Do Car Loans Work?
You have to pay back your car loan according to the loan’s terms. That means paying back a set amount of money each month for the length of the car loan, plus interest. The most common term lengths are 24, 36, 48, 60, 72, and 84 months. If you divide up your total loan amount over the length of your loan, you’ll see that the longer the term length is, the lower your monthly payment is. You end up paying more in interest if your loan is longer.
The lender will hold the title to your car until you repay the loan. That means it will have the power to repossess your vehicle if you miss too many payments or default on the loan. So choosing the right loan terms is essential. If your loan length is too short and your monthly payment is too high, you risk not being able to make your loan payments on time. If your loan length is too long, you’ll end up paying significantly more in interest than you might need to.
Determining Factors of Your Loan Details
Your loan details depend on three main factors:
- Loan amount: The purchase price minus any down payment. A higher down payment will decrease both the loan amount and the amount of interest you’ll pay back over the life of your loan.
- Annual percentage rate (APR): The yearly cost of borrowing the money for your car loan, including your interest rate and additional fees. The higher the APR, the more you’ll pay back over the life of your car loan.
- Loan term: How long it will take to pay the loan back. Shorter terms mean that you’ll pay off your car faster and pay less interest, while longer terms will allow you to lower your monthly payment and purchase a more expensive car.
Car Loan Approval Process
While you can shop for your car first and then apply for a loan afterwards, this can often result in disappointment if the lender denies your loan application or if the monthly payment ends up being more than you bargained for. The best way to get a loan is to complete a preapproval process before you shop. That way, you’ll know exactly what cars you can afford before you start looking. The typical steps for getting a car loan include:
- Applying for the car loan
- Getting preapproved
- Shopping for a car within your loan limit
- Finalizing the loan with your lender
Navigating Challenges and Managing Your Car Loan Efficiently
Getting a car loan gives you the freedom to buy a new car, and it can also help you build your credit score and gain financial security over time. However, it’s important to make wise choices when securing and paying off your loan to avoid financial repercussions.
Increasing Your Down Payment: A Strategy for Savings
Before shopping for a car or car loan, try to put as much into savings as possible and maximize the value of your trade-in vehicle. The more you’re able to put down for your new car, the more you’ll save on interest with your new car loan.
Maintaining a Strong Credit Score for Future Loans
Once you have your loan, be sure to make payments on time. This means you’ll need to consider the loan terms wisely and opt for a monthly payment that you can realistically afford. Making payments on time now will help maintain your credit score for future loans.
The Potential for Refinancing: When Is It Right?
Refinancing can help you lower your monthly payment or save money over the life of your loan. You might consider refinancing if your credit score has improved, interest rates have dropped, or if you simply want to adjust your loan terms.
Get Preapproved for a Car Loan at Johnson Family Chevrolet Today
At Johnson Family Chevrolet in Woodlawn, Virginia, we’re ready to help you secure your next car loan. If you have any questions about the financing process, contact our finance team for help getting preapproved today.
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