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What You Need to Know About Auto Loans

An auto loan is a type of personal loan that’s used to buy a new or used vehicle. Depending on the borrower’s credit rating, annual income and size of the loan, lenders may offer auto loans with repayment terms that range from one to five years. The longer the loan term, the more money the borrower will pay in interest charges. The most competitive rates are generally available to borrowers with excellent credit.

Before you apply for an auto loan, check your credit score to make sure it’s high enough to qualify for the best rate. If your credit isn’t strong, you can improve it before applying for a car loan by paying down existing debt and limiting new purchases.

When shopping for an Auto Loan, compare the annual percentage rate (APR) and total cost of credit to ensure you’re getting a fair deal. APR includes both the loan’s interest rate and any other fees, expressed as a percentage. Some lenders may also charge a prepayment penalty, which is a fee you’ll pay if you pay off your loan early.

Many car dealers also offer their own in-house financing, which is often known as dealer-arranged financing. The dealer may have special programs that aren’t available to the general public, such as manufacturer-sponsored low-rate incentives or shorter contract terms. If a dealership offers these programs, you should try to qualify for them by providing proof of income and verifying your debt-to-income ratio.

If you’re preapproved for an auto loan, you can go to a car seller with a high degree of confidence that you’ll get the financing you need to buy the vehicle you want. In order to be preapproved, the lender has reviewed your credit report and verified your debt levels and income. Preapproval isn’t a guarantee of approval, however, and the lender can change its mind once you’re at the dealership.

Financing a car is often the best option for those who need to drive one but don’t have the cash on hand. The monthly payments on an auto loan are usually lower than those on a lease, and borrowers build equity in their cars over time as the balance of what they owe declines compared to the car’s current value.

One of the downsides to financing a car is that it can take years to pay off the balance, and by then the vehicle will likely be worth less than what was originally financed. That’s why it’s important to choose the shortest term that you can afford, even if that means increasing your monthly payment a bit. Ultimately, buying a car with cash is often the most cost-effective choice.

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