What is an Auto Loan?

What is an auto loan and how does it work? Buying your first car is never easy. There’s plenty of terminology and math that comes with your first car, but one thing you should learn about is two words: auto loan.

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What is an Auto Loan?

Auto loans are actually very helpful in paying off a car because most people don’t usually pay the full sticker price for their car right away.

Put simply, it is. . .

The money provided to you by either your bank or auto dealer that allows you to purchase your car. The catch of this “money” is that you must repay the loan through monthly payments over time.

With that out of the way, here are some things that come with most auto loan agreements that will give you an understanding of the inner workings of an auto loan:

• Term Length: Like other loans, your payments can be the average length of 2 to 3 years, which is determined by several factors. Discovering a plan that is right for you is key.
• Interest rate: Call this the “extra” charge. In other words, the interest rate is the annual percentage cost that the lender will charge you when you borrow the money. A lender also quotes this as an annual percentage rate (APR).

Now that you have an idea of what an auto loan is and what it is made up of (interest rate, APR, loan length), it’s time to understand how you pay for your auto loan.

How do I Pay for an Auto Loan?

Depending on your situation, negotiating with your lender on the best payment plan is the key. There are many ways to pay off your auto loan early and efficiently, but here are a few tips that may shorten your auto loan repayment by a few months, all while saving you plenty of your own money.

• Making half payments: Depending on the deal you make with the lender, a way to rack up more payments every year is by paying every two weeks. Per year, that’s 26 half payments, which equals 13 full payments a year. Compare that with 12 full payments per year with monthly payments.
• Rounding up: Another way to pay quickly is rounding your payments up to the nearest $50. For example, instead of paying $315 a month on your auto loan, you pay $350, which speeds up the process of repaying your car loan by several months, as well as paying less in interest per year.
• Refinance your loan: Maybe the auto loan you have is not what you wanted, or you feel you have enough income to pay it off faster. Refinancing your auto loan allows you to negotiate a new monthly payment and/or a sooner pay-off term. However, only consider refinancing your auto loan if you know it won’t raise your interest or further lengthen your term.

One word of advice that all borrowers should keep in mind is to never skip on your payments. Not only could it look bad on your credit history, but it raises your interest.

How Can an Auto Loan Affect My Credit Score?

With words like auto loan, interest, and refinancing, there’s a lot to take in when it comes to buying a new car. But the benefits of paying it off are just as significant as you think.

If you are on time with your payments, that could positively impact your credit.

Your Credit Score is your identity in the world of banks, loans, and mortgages. A good credit score tells financial institutions that they more than likely accept you for these things.

These factors and calculations on your credit score are more than just paying for things, but a big part of it comes from something like an auto loan. Just as it can do good for you when you do make your payments, missing payments on the other hand can negatively impact your credit.

Based on what you now know about auto loans and their components, let’s break it down one more time:

• Auto Loans are used to pay for a car.
• Interest is the percentage of the cost given to you by the lender.
• Payments and the agreement are between you and your lender, and avoiding late payments is the best way to keep your credit strong and avoid repossession of your vehicle.

Car financing is another responsibility that every consumer should be aware of. Make sure to pay it off and keep your credit history healthy.