How Do Car Loans Work?
If you are going to be purchasing an automobile with vehicle financing, it is important to understand how auto loans work before selecting an offer. In this article, we will help you to understand the costs of an auto loan, the types of auto loans you can apply for, where you can get a car loan, and the basic steps to qualifying.
Factors Impacting the Cost of an Auto Loan
Lenders will decide whether to offer you a loan and at what interest rate based on factors such as your credit score and income. There are a couple of factors beyond the interest rate which also impact how much an auto loan will cost you each month and how much it will add up to over time. These include the loan term and the down payment that you make.
The more money you can put down on a vehicle, the sooner you can get it paid off. While a shorter loan term means you will pay more toward the principal of your loan each month, it also means that your interest will add up to less over time.
Types of Auto Loans
Auto loans may be either secured or unsecured.
- With a secured auto loan, the vehicle you are purchasing acts as collateral should you fall through on your payments.
- With an unsecured auto loan, there is no collateral required.
Many borrowers are under the impression that they require a secured auto loan if they have bad credit. But there are actually quite a few reputable online lenders who are willing to offer unsecured auto loans to customers even with poor credit.
If you do want to raise your credit before you apply, there are many options for doing so. These include checking your credit reports and correcting errors, reducing your credit utilization, paying off existing debts, and signing up for Experian Boost so that your credit score will reflect your timely utilities and phone bill payments.
Where to Get Auto Loans
Car loans are available from:
- Banks and credit unions
- Direct lenders online
The advantages of auto loans through direct lenders online include:
- A fast and easy application process that involves just a few steps and which does not require you to drive anywhere (which can be very helpful if you do not yet own a car).
- A wider selection of lenders and lending products to choose from.
- More flexible qualification requirements.
- Greater freedom when it comes to purchasing a vehicle. Unlike with “buy here, pay here” establishments offline, you get to buy your car anywhere you want.
- Online lenders are more likely to run “soft” credit checks which do not damage your score. They also are more likely to factor in your income instead of just looking at your score.
How to Apply for an Auto Loan
Here are the basic steps to apply for an auto loan online.
1. Gather your documentation.
You will need some basic documents to qualify for the auto loan. You will need to be able to prove your identity, residence, and income. You also may need documentation regarding the vehicle you will buy with the loan.
2. Fill out the quick application form.
Many online auto lenders provide fast application forms which you can fill out in just minutes.
3. Review offers and sign on the one you want.
Once you provide your information, lenders will get back to you with offers. Look over the offers and choose one to sign on.
4. Await final approval and disbursement of your loan.
At that point, all you need to do is wait for final approval and for financing to be disbursed to you.
Apply for an Auto Loan Now
You now know the answer to the question, “How do auto loans work?” You can see that while there are a number of considerations involved with choosing a loan offer, the basics of applying for an auto loan online are pretty simple and straightforward. If you are ready to apply for an auto loan today, take a look at our recommended online lenders.