Auto Loans Explained: Everything You Need to Know

An auto loan is money you borrow to pay for a vehicle. But every auto loan is different, and comparing your options to find the best loan for you can save you thousands of dollars. In this blog, we’ll break down the variable components of an auto loan so that you know what to look for when applying for one.

How do Auto Loans Work?

Once you’re approved for a loan, you’ll use the money to purchase a vehicle. You’ll then repay the loan, with interest, to your lender over a set period of time. Those are the basics, but the specifics can vary widely. We’ll explore those next.

Key Components of Auto Loans

Principal

The principal is the amount of money that you borrow to purchase the vehicle. This is the amount that you will gradually pay off over the term of the loan. The principal plus the down payment makes up the cost of the car. The bigger the down payment, the smaller the principal can be.

Interest Rate

The interest rate is a fee assigned to you by the lender in order to borrow the money you need. It is expressed as a percentage of the principal and is included in your monthly payments. A lower interest rate means you will pay less in interest over the life of the loan. A higher credit score or shorter loan term can usually net you a lower interest rate. The type of vehicle you are buying can also affect this number.

APR (Annual Percentage Rate)

The APR is the total cost of the loan that you will pay each year. This includes monthly payments, interest, and other fees. It is expressed as a percentage of the principal. It is a more accurate and comprehensive representation of the true cost of borrowing than the interest rate alone.

Monthly Payment

The monthly payment is the fixed amount you pay to the lender each month to repay your loan. It’s calculated based on the interest rate, loan term, and principal.

Term

The loan term is the length of time you have to repay your loan. Common terms for auto loans range from 36 to 72 months. A longer term typically results in lower monthly payments, but you’ll pay more interest over the life of the loan.

Find the Perfect Auto Loan at SharePoint Credit Union

Understanding the components of an auto loan is crucial for finding the right loan for your needs. At SharePoint CU, we offer competitive auto loans with low rates and incredible value. Learn more about our loans on our website and contact a representative today to discuss your options. We’re happy to help!
 

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