The factors that have caused car prices to rise significantly over the last few years include a global shortage of chips, inflation, low inventories, and high demand. According to the U.S. Bureau of Labor Statistics’ April Consumer Price Index report, the average price of new cars rose 12.5% between March 2021 and March 2022. During the same time, the average price of used cars and trucks increased 35.3%.
Jeffrey Roach, chief economist of LPL Financial, said that prices don’t matter if someone truly needs a vehicle. He compared car shopping in today’s market to similar problems homebuyers face.
You can’t do much about the supply problems that have led to high car prices if you don’t want to wait. Instead, focus your efforts on finding the best car loan for financing your new vehicle.
Matt Degen, editor of KBB.com (a vehicle valuation and automotive research firm), says that you are shopping for two things: a car and financing. You want to shop around for the best rates and terms.
To shop empowered and streamline your auto financing process, it is important to first understand the basics of auto loans.
What is a car loan?
A car loan is a way to finance the purchase of a vehicle if you are unable to pay cash. These loans are offered by banks, credit unions and online lenders.
An auto loan can be used for the purchase of a new or used vehicle. Once you are approved for financing, the proceeds of the loan are paid to you. You will also make equal monthly payments over a period to the lender.
What are the Key Terms for Car Loans?
Without knowing the terminology used by lenders, it can be difficult to understand car loan terms. These are some important terms that you should know before applying for auto financing.
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Annual percentage rate (APR), how much it costs to borrow money. This is often expressed as an annual percentage, and includes both interest and fees.
Interest rate: This is the cost of borrowing, expressed in a percentage and minus any fees.
Principal: The principal amount that you borrowed from the lender to buy the vehicle. This includes interest and any fees.
The loan term is also known as the repayment time. It refers to how long you will have to pay your monthly installments. A typical auto loan term is 24, 36, 48 or 60 months. It can also be 72, 72, 72, or an 84-month term. A longer term means lower monthly payments, even though you have the same principal and APY. This is because the loan amount is spread over a longer time period. You’ll be in debt longer and pay more interest.
Taxes and fees: Along with the purchase price, there are state sales taxes, loan fees and dealer fees. These extra costs may be included in your auto loan depending on which lender you work with.
A down payment is the amount you pay upfront to purchase a car. Your down payment is the amount of money you pay upfront to purchase a car. This will reduce your monthly payments and allow you to pay lower interest rates over the term. The dealer’s offer for you to trade in your vehicle is included in the down payment.
Monthly payment: This is the amount you pay to the lender each month in principal, interest, or fees.
Amortization refers to the way your monthly payment is divided between principal and interest over the term of the loan. A larger portion of your monthly payment will be allocated to accrued interest at the beginning of the loan. The principal is paid less. Your monthly payment will go toward principal and not interest at the end of your loan.
Total cost: The total amount that you pay for the car, principal, interest and fees.
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Prepayment penalty: This is a fee that lenders may charge you if your loan is not paid on time. You can pay more each month or make a lump sum payment. It will be mentioned in the fine print if your loan has a prepayment penalty.