Car dealers work with lenders to provide you with auto loans if you are planning to pay your car off over numerous monthly installments. This is more expensive than simply buying your car in full at once, because you will be paying interest on your monthly payments, meaning that you will pay more for the car overall, over a longer period of time. As of late 2017, the average monthly car payment has been reported at around $501 in the United States.
As aforementioned, you will pay interest on your auto loan, and several things are taken into consideration when determining your interest rate. Your capital (i.e. cash and savings) are taken into account, including whether or not you put down a deposit on your car. Your credit history and credit score will also be checked, as lenders want to determine the likelihood that you will meet payments and pay them in full. Those with good credit histories are more likely to be offered better interest rates. Approximately 34% of auto loans are subprime, meaning that they have high interest rates due to borrowers possessing bad credit.
Sometimes dealers may also include a dealer markup which raises your APR, so be sure to watch out for this. The car’s value is also taken into account when calculating your interest rate, and you should always take into account your car’s depreciation when considering an auto loan. New vehicles tend to depreciate by around 70% a mere 4 years after their initial purchase, and this is definitely something to keep in mind if you plan to sell the car in the future.
You repay your auto loan monthly, paying off a chunk of the car’s value as well as any interest. It is similar to a personal loan in this way, as you will pay fixed monthly installments with fixed interest rates over fixed time periods. It is important to pay your auto loan bills in full and on time, as failing to meet auto payments will inevitably harm your credit score.
It is also fairly common for people to refinance their auto loans, as auto payments are often one of the most expensive monthly payments that people will have to make. Refinancing an auto loan can be a good idea when interest rates drop. You may also have improved your credit score over time, which can lead to the approval of a lower interest rate. Additionally, you may also simply find a deal from a lender that is much better than the options you had available to you when you bought the car in the first place.
Auto loans allow you to purchase newer cars which are likely to be more reliable and safe than older or second-hand cars. However, make sure that you are able to afford your monthly payments, otherwise, you may regret it in the future.