For most people, purchasing a car entails taking a car loan. If you are considering purchasing a new car, it is likely that you’ve researched the different car options available to you. While doing this is an important step in purchasing a vehicle, it is equally important to understand how car loans work, so you can pick the best loan available to maximize savings and reduce interest payments. To this end, here’s a quick guide on car loans.
What Is a Car Loan?
Car loans, in most cases, are secured loans, wherein the vehicle you purchase acts as the collateral. Typically, once you take a car loan, you make monthly repayments to the lender until you have repaid the entire loan amount. Car loan terms typically range for 5-6 years. The three main elements of a car loan are:
Principal: The principal is the amount you borrow. If you make a down payment, the principal is likely to be lesser than the value of the car.
Loan term: The loan term is the duration that you, as a borrower, take to repay the loan in full to the lender.
Interest: For giving you a loan, the lender charges an interest that is built into your monthly payments.
Things to Consider Before Taking a Car Loan
Debt-to-income ratio: You should consider your debt-to-income ratio before applying for a car loan. Having too much debt may make it tougher for you to access credit in the future when you really need it.
Monthly installment amount: Make sure to calculate how much you will need to pay to the lender on a monthly basis if you take a car loan. Once you know the approximate figure, check your budget to see whether you can afford to pay the monthly installment.
Interest rate and other fees: The interest rate other fees can significantly affect the cost of your loan. So, ensure that you pay close attention to the rates quoted by different lenders. Ideally, you should pick a car loan with the best interest rate and low charges.
Keep in mind that with car loans, a low monthly payment does not necessarily mean you are saving money. It is important to compare different car loans available, so you are able to opt for one with the best terms.
