Car Loans: How They Work & What to Know

According to thezebra.com, half of Americans relied on auto financing to purchase their last vehicle. So, if you’re planning to buy a new or used car, there’s a good chance you’ll want or need financing. Unfortunately, many buyers spend most of their research on vehicles instead of loans. If this sounds like you, don’t worry. We had our finance experts at Eskridge Chevrolet of Guthrie, Oklahoma, explain how car loans work and what you can expect from the process.

What Is a Car Loan?

Like any loan, when you take out a car loan you receive a lump sum of money you agree to pay back over time. Your interest payment and the loan amount will vary depending primarily on your credit score and income. As you begin researching loans, here are some of the terms you should understand:

1. Loan term: This refers to the time you’ll have to repay the loan. Lenders usually express this in months, typically 36 to 72.
2. Annual percentage rate (APR): Your loan APR is the amount you pay yearly, including any lender fees. Comparing the APR of different loans is the best approach when deciding which to choose.
3. Interest rate: Your loan interest rate is the multiplier banks use to calculate their markup. This is different than APR because it doesn’t include fees.
4. Down payment: This is the amount of money you agree to pay upfront toward the vehicle, with some deals requiring a minimum amount to be paid before approval. However, the more money you put down, the less you have to borrow and the lower your monthly payment.
5. Principal: This is the amount of money borrowed.
6. Taxes and Fees: Every state has its tax rate, and some regions have additional taxes. In addition, some deals contain documentation and origination fees, so we recommend you talk with our finance department about these figures.
7. Monthly Payment: Lenders use points one to six to calculate your monthly payment.

Key Factors That Affect Your Loan

Understanding the above terms will help you navigate the loan process. But the APR, principal, and loan term have the most significant impact on your loan. Therefore, we recommend you start the loan process by carefully examining your budget. For example, you need to know how much you can afford in a monthly car payment. From there, you can begin shopping for loans.

At Eskridge Chevrolet, we have an online payment calculator that can help. You can enter the loan amount, terms, APR, trade-in value, and down payment to see how the deal comes together.

Naturally, the higher the principal, or the amount of money borrowed, the higher your monthly payment will be. The lender’s annual percentage rate then comes into play. As the APR rises, so too does your monthly payment. Finally, there’s the loan term. The longer the loan, the lower your monthly payment and vice versa.

Shop Chevy Car for Loans

We recommend you shop for a car loan next. Rates vary by lender, and your credit score and income ultimately determine your APR. Eskridge Chevrolet has streamlined the loan process with our online pre-approval application. You’ll know your loan amount, APR, and monthly payment in minutes. Once you receive pre-approval on a loan, you can start accurately assessing specific deals.

Using our payment calculator, you can input various figures for the loan amount, term, and APR and see your estimated monthly payment. For example, you can input a $30,000 loan amount with a 4.9% APR with a 72-month term, which results in a $482 monthly payment.

Now, if you calculate a $500 monthly payment fits your budget, a loan with these parameters works. However, if your budget only allows for a monthly payment of $425, you must adjust your figures.

You can shop for a longer term. For instance, a $30,000 loan at 4.9% APR with an 84-month term lowers your monthly payment to $423.

You can also shop for a lower APR. Lowering your APR will lower your monthly payment, although this has a lesser impact than extending the term. For instance, a 2.9% APR on the same 72-month loan amount lowers your monthly payment to $454. If you extend this to 84 months, your monthly payment drops to $395.

When shopping for a car loan, the goal is to find the lowest APR with a comfortable term length. Remember that the longer the term, the more money you’ll end up paying for the car.

Budget Correctly

We mentioned earlier you should develop a budget for your monthly payment. However, you’ll want to make sure you factor in your new car’s financial aspects.

For example, your car insurance could increase for several reasons. First, lenders require you to obtain more coverage to protect their investment, which raises your rates. Also, your new car is probably worth more money than your old car and will cost more to insure.

It would help if you also considered fuel expenses. For example, if you trade your fuel-efficient sedan for a Chevrolet Silverado pickup, you can expect to spend more on gas.

The last thing you want to do is buy a new car only to find out you can’t afford to drive it because you don’t have money left over in your budget to enjoy date night or an evening hanging out with friends.

Dealership Financing Programs

You have many options for lenders. First, however, we recommend you shop our dealership financing programs. Eskridge Chevrolet has relationships with various local and national banks, and our finance managers can present you with competing loan offers. This allows you to choose a loan that best fits your needs.

Unfortunately, some lenders prey on the unwary shopper, advertising low rates and then quoting higher rates once you apply. Sometimes, buyers come to us with significantly higher rates than they would qualify for through our dealership financing program.

Apply for a Car Loan Today

At Eskridge Chevrolet, our finance managers have the expertise to get you the perfect loan whatever your credit category. Our online loan application makes it easy to apply. However, if you prefer a personal discussion, please stop by our dealership in Guthrie, Oklahoma, and speak with one of our loan experts. Our finance pros will answer your questions and get you the loan you deserve.

 

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