Key Terms To Know About Car Loans

Key Terms To Know About Car Loans:

What is a car loan?
A car loan allows someone to borrow money to purchase a car. When you do not have the cash on hand to buy a new car, a car loan helps you buy it. Whether the vehicle is new or used, you are borrowing money from a lender where you agree to pay back the loan over three to six years, plus any fees and interest you accrue. A car loan helps to make vehicles that cost thousands of dollars more affordable by splitting the cost into monthly payments.

Key Terms to Know:
 
Annual Percentage Rate: APR in a car loan is the interest rate that needs to be paid each year; this includes the interest and the fees that are given as a yearly percentage. The higher the Annual Percentage Rate, the more significant the amount you owe in return. 
 
Loan Term: The loan term is the length of time the loan must be paid back. Loan terms vary between 36-72 months, depending on the loan.  Shorter terms usually mean higher monthly payments, but less interest paid by the end of the term. Longer terms usually mean the opposite, lower monthly payments and higher interest paid by the end of the term.
 
Total Cost: The total cost is the total loan amount; this includes interest and any fees for arranging the loan. 
 
Down Payment: It is the sum of money you apply toward the cost of the car before the loan term begins. This payment can be made in cash, the value of a vehicle trade-in, or both. The larger the down payment, the more favorable the rest of the loan term is because this amount will affect the length, interest, and monthly payment. In addition, a higher down payment will lower the overall amount you need to finance. 
 
Monthly Payment: The monthly payment is the amount you owe each month. This amount depends on the amount of the loan, the loan term, the interest, and fees, if applicable. 
 
Principal: The principal is the amount that you originally agreed to pay back. This amount is free of any interest or fees. Most of the minimum monthly payment will go towards interest, and then some will go toward the principal. The higher the principal, the higher the interest.
 
Example: Let’s compare a $25,000 loan at 3.75% interest rate with two different loan terms (this does not include any applicable sales tax)

The longer the term, the lower the monthly payments out-of-pocket costs, if you pay the loan in five years instead of five years, you will end up paying an additional $984 in interest over the life of the loan.

Here at ALLIANCE, we’d love to help you with your car buying journey by getting you into your dream vehicle in the quickest possible time with the lowest possible rates. Visit our auto loans page by clicking here to apply online and learn more about how we can assist your auto loan needs today. Stop at any of our seven branch locations across Lubbock or call us today at 806-798-5554 to speak to one of our loan officers.