Four Facts That Make Car Loans Easy to Understand

Car loans have been around for decades, and yet there seems to still be a cloud of confusion for many people, specifically aspiring car owners, as to how it works. Fortunately, it's not that difficult at all to understand what a car loan is and how it works. Lending institutions and individuals just like to use fancy words to make it seem like a complex transaction. To help you navigate your way into a financing deal, here are four facts you should know about car loans:

1 - Credit Score
Credit scores were once optional. Nowadays, however, every dealership requires verifiable proof of creditworthiness. It determines whether or not you are eligible for a car loan and how much your rate should be. A super prime credit score, which ranges between 781 to 850, will yield lower interest rates at less than 3 percent if you are financing a brand new model. On the other hand, a subprime credit score of 600 or less will slap you with as much as 10.65 percent in interest on the same loan. That's a 7 percentage point difference, which if you're taking out a 60-month car loan, can add up to a very significant sum over time. Try to improve your credit score first before getting a car loan.

2 - Loan Term
This pertains to the amount of time you have to repay the loan. Back in the olden days, car loans were typically issued with a 36-month repayment plan. Today, however, it's very common to find loans that have a repayment term of up to 72 months or 6 years. While this stretches the total cost and makes monthly payments more manageable, be warned that it will also increase the total sum of interests paid over the loan's lifecycle. To put this into perspective, say you are extending your car loan, which is worth $25,000, from 48 months to 60 months. Using a three percent interest rate as an example, that would decrease your monthly payments to roughly $104, but it'll also result in you paying close to $400 more in interest.

3 - Car Financing Options
There are many ways to finance a new car aside from a classic car loan. Different factors play a key role in deciding which financing option best aligns with your needs and circumstances. The car make and model you plan on getting, credit score, and location are some of the factors that lenders will consider. Be creative when looking for ways to finance your new car. For instance, if you have an existing car, you can secure a car title loan to fund the new one. As the name suggests, a title loan uses the title of your existing vehicle as collateral for securing a sum of money.

4 - Hidden Costs and Charges
Your financial circumstances today and tomorrow could be night and day. Having flexibility on your car loan is essential to avoiding any prepayment fees. Find a car dealership, credit union, or private lender that will allow you to repay the outstanding loan amount partially or completely ahead of schedule without penalizing you for the early repayment. Check and recheck the fine print and make sure you don't overlook any clauses that might bite you later on. Keep in mind that in some contracts, penalties aren't even referred to as "penalties". Furthermore, in some states, prepayment penalties have been banned, which means that lenders have to look for other means of discouraging early repayments so they can collect more on interest.

Final Thoughts
Perhaps the last piece of advice to know is that shopping for car loans shouldn't be entirely focused on the initial price of the vehicle. While it obviously makes sense to know how much a vehicle will cost you out of pocket, there are more important things to consider including the loan term, APR, and any fees that apply.