It is now more difficult and more costly to buy a car
The factors that have caused car prices to rise significantly over the last few years include a global shortage of chips, inflation, low inventories, and high demand. According to the U.S. Bureau of Labor Statistics’ April Consumer Price Index report, the average price of new cars rose 12.5% between March 2021 and March 2022. During the same time, the average price of used cars and trucks increased 35.3%.
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Jeffrey Roach, chief economist of LPL Financial, said that prices don’t matter if someone truly needs a vehicle. He compared car shopping in today’s market to similar problems homebuyers face.
To shop empowered and streamline your auto financing process, it is important to first understand the basics of auto loans.
What is a car loan?
A car loan is a way to finance the purchase of a vehicle if you are unable to pay cash. These loans are offered by banks, credit unions and online lenders.
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An auto loan can be used for the purchase of a new or used vehicle. Once you are approved for financing, the proceeds of the loan are paid to you. You will also make equal monthly payments over a period to the lender.
What are the Key Terms for Car Loans?
- Without knowing the terminology used by lenders, it can be difficult to understand car loan terms. These are some important terms that you should know before applying for auto financing.
- Annual percentage rate (APR): How much it costs to borrow money. This is often expressed as an annual percentage, and includes both interest and fees.
- Interest rate: This is the cost of borrowing, expressed in a percentage and minus any fees.
- Principal: The principal amount that you borrowed from the lender to buy the vehicle. This includes interest and any fees.
- Taxes and fees: Along with the purchase price, there are state sales taxes, loan fees and dealer fees. These extra costs may be included in your auto loan depending on which lender you work with.
- Total cost: The total amount that you pay for the car, principal, interest and fees.
- Prepayment penalty: This is a fee that lenders may charge you if your loan is not paid on time. You can pay more each month or make a lump sum payment. It will be mentioned in the fine print if your loan has a prepayment penalty.
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How do car loans work?
Car loans can be paid in monthly installments throughout the loan term. These loans are secured debt products, meaning that the lender will retain the car’s title while you pay the loan. The lender may repossess your vehicle if you are unable to make your loan payments.
A dealer might offer financing options to help you purchase a car. A private lender, such as your bank or credit union, may offer financing that is more favorable to you. No matter where you apply for financing a lender will usually look at your credit score and income to determine whether or not to approve you for a loan.
You will most likely have the option to choose from multiple loans with different interest rates, loan terms and monthly payments. Compare rates from different lenders to get the best deal.
What is the interest rate on a car loan?
You should first check your credit score before you begin shopping for a car. This will give you an idea of where you are and the rates that you may be eligible for. These strategies can help you repair your credit if your credit score is not perfect.
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You may be able, like with a mortgage to refinance an existing loan to get a lower rate. However, don’t put your hopes on it when you purchase a car. You may need to meet some requirements before you are able to refinance your loan. If your credit score or the rate environment change, you might not be able get a better rate.
