How Do Car Loans Work?

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Are you in the market looking to purchase a new or used car? If so, you most likely aren't thinking about paying the full payment outright. The majority of car buyers will typically take out a car loan in order to get the car they want instead of waiting until they have the full lump sum saved up. That's where a car loan can come in handy. However, you may ask yourself at this point: How do car loans work?

There are many details, nuances, and moving parts to understand when it comes to getting a car loan. Luckily, most of these details are pretty straightforward. In this article, we'll explore what a car loan is, how it works, and other important details you need to know before you take one out. Keep reading to learn more.

What is a Car Loan?

A car loan (or auto loan) is a type of loan explicitly used for the purpose of obtaining a new or used vehicle. You can get a car loan from a credit union, a big bank, or even the dealership from which you're purchasing the vehicle. A car loan enables you to own a vehicle without having to pay the full price upfront. Most people don't have enough spare cash lying around to afford a vehicle outright.

As a result, car loans can be a great alternative to getting the transportation you need more quickly and efficiently. When you get the loan, you'll be required to pay it down over a predetermined and agreed-upon timeframe. The timeframe will depend on numerous variables, such as your budget, the vehicle type, your income, and more.

Types of Car Loans

When asking yourself how do car loans work, there are a few different types of car loans to consider. Each of these car loan types comes with its own unique set of advantages and disadvantages. Let's take a closer look at each to determine what they entail.

Secured vs. Unsecured Loans

You'll often come across secured versus unsecured loans when shopping around for a car loan. A secured loan uses the vehicle in question as a form of collateral. As a result, if you default on the loan, the vehicle will be repossessed. A secured loan is typically better if you have a bad credit score-most car loans are secured.

Conversely, an unsecured loan has no collateral requirements since it's based on creditworthiness. Moreover, there is often no limit on how you choose to use the funds. However, unsecured loans are typically harder to obtain and may come with higher interest rates.

New vs. Used Car Loans

The most significant difference between new and used car loans boils down to cost. Typically, new vehicles will be more expensive than used vehicles. You'll often receive a higher loan principal to accommodate the larger sticker price of a new vehicle. This means you'll have higher payments on the loan. However, new car loans often have lower interest rates than used car loans.

In contrast, used cars are cheaper and come with smaller loan principals, meaning the loan terms tend to be shorter than those of new cars. However, used car loans generally come with higher interest rates because it's more challenging for lenders to assess the value of a used car compared to a new one.

Understanding Loan Terms

Before you sign the dotted line and drive off the lot in your vehicle, it's important to familiarize yourself with the loan terms. This is just as important as knowing how do car loans work. At the very least, understand the basic terminology to better grasp what you're getting into.

Principal Amount

Simply put, the principal amount is the sum of the loan the lender provides to you, the borrower. It's also the amount the lender will use to calculate interest. One key point to remember is that the interest charged on the loan is not part of the principal.

Interest Rates

The interest rate is essentially the price of borrowing the money and is the percentage the lender charges on top of the principal. The money you repay will generally be more than the borrowed amount because the lender takes on risk and will require compensation for lending out the money.

Loan Duration

The loan duration refers to the length of time required for you to completely pay off the full loan amount. This term can vary depending on your financial situation and the specifics of the loan agreement.

The Loan Application Process

The loan application process is relatively simple and involves just a few steps. First, make sure you have the proper documentation on hand. You'll typically need to provide the following:

• Social Security number
• Gross annual income
• Employer name and address
• The amount of your loan
• Vehicle lienholder name

Once you have these, fill out the application form by entering all the necessary details. Then, submit the required documents to prove your income, age, address, and identity. The lender will then verify this information, confirming your financial status and identity to determine whether you qualify for the loan.

Choosing a Lender

It's important to consider the type of lender you want to get your loan from. Once you understand how each lender operates, you can decide which one is the best fit for your needs. Here are a few options to consider:

Dealership Financing

Dealership financing is a common option for obtaining a car loan. Dealerships often work with financial institutions to offer competitive interest rates and financing plans. This can be particularly beneficial if you have a bad credit score or limited credit history.

Banks and Credit Unions

Banks and credit unions are another option to consider when applying for a car loan. Credit unions, in particular, tend to offer lower interest rates. Meanwhile, banks often provide more flexibility and are less likely to impose restrictive terms and conditions on the repayment process.

Online Lenders

For those who want a fast and convenient application process, online lenders might be the best option. With online lenders, the application process is typically quick and easy, requiring minimal paperwork. You can simply provide basic information about yourself, and if everything checks out, you'll receive your loan in no time.

Understanding Interest Rates

Gaining an understanding of interest rates is a crucial aspect of learning how do car loans work. Here are a few key concepts to know about interest rates:

Fixed vs. Variable Rates

A fixed interest rate means that the rate stays the same throughout the loan's duration. This ensures predictable monthly payments. On the other hand, a variable interest rate fluctuates based on an underlying benchmark, which means your payments could vary over time.

How Credit Scores Impact Rates

Your credit score is an important indicator of your financial trustworthiness. As such, it plays a significant role in the type of car loan you can obtain and the terms that come with it. If you have a good credit score (typically between 760 and 850), you'll likely receive a lower interest rate.

On the flip side, if you have a lower credit score (typically in the range of 620 to 639), you may end up with a higher interest rate, which will result in higher monthly payments.

Additional Costs to Consider

Unfortunately, getting a car loan isn't always as simple as signing the paperwork and driving off. There are often hidden costs to be aware of. These may include:

• Dealer fees
• Documentation fees
• Dealer preparation fees
• Extended warranties
• Insurance
• Sales tax
• Prepayment penalties
• Opportunity cost

If you're not prepared for these costs, they can catch you by surprise. To avoid this, consider negotiating terms, signing for a shorter loan term, or making a larger down payment to minimize these extra charges.

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Granite Hyundai Can Help You Get a Loan

If you have a bad credit score or are still wondering how do car loans work, Granite Hyundai can help. We offer a Credit Repair Program that's specifically designed for individuals with no credit or poor credit. The program allows you to finance a vehicle, and the best part is that when you make your payments on time, it will significantly improve your credit score. Over time, this can help rebuild your credit.

Credit bureaus track and report your on-time payments, which directly contribute to your credit history. This helps demonstrate your financial responsibility and reliability to future lenders.

Use Granite Hyundai's Credit Repair Program

A car loan can be a great way to get the vehicle you need to streamline your life. If used responsibly, a car loan can be an incredibly valuable asset. And the best part? At Granite Hyundai, we offer a Credit Repair Program that can help you rebuild your credit and enjoy the benefits of a strong financial foundation.

Our proven system is designed to help restore your credit, making it easier for you to obtain future auto loans. So, if you're ready to repair and rebuild your credit, contact us today to learn more.