How to Get a Car Loan

Introduction

* Unless you are independently wealthy or have been scrimping and saving for the past several years, you will probably need to take out an auto loan to finance your car. Most dealerships provide financing, but they don't always provide the best possible deal on financing.
* It is best to secure financing from your bank or an online lender. If the dealership from which you buy your car can match or better your bank's terms or offers a rebate as part of their financing package, you might then consider using the dealership as your lender.
* The information presented in this guide will walk you through securing the best financing package for your new car or vehicle.

The Parts of a Loan

# If you can't afford to pay for an expensive item like a car, home or college education in full, you can apply for a loan. A loan is exactly what it sounds like—a financial institution or individual lends you the money to pay for an item or service with the expectation that they will be paid back in full plus interest. Lenders naturally prefer to lend money to borrowers who have a history of handling their finances responsibly.
# Loans are made up of a few different components:

Term

* The term of the loan is its length. Will you be paying back the bank, dealer or your parents over 36 months, 48 months or longer? Remember that the longer it takes for you to pay back the loan, the more you will pay in interest.
* BankRate.com advises that you "run like the plague" from lenders offering 72-84 month car loans and aim for a loan term of five years or less—preferably less.

Interest Rate


* The interest rate is the percentage of the loan you're charged for borrowing the money in the first place. Your interest rate will, in part, be determined by your credit history.
* The APR (Annual Percentage Rate) is the best rate to use when comparing lenders. The APR is a way of expressing the "finance charge" you owe on a yearly basis; the "finance charge" includes both the interest and any fees you owe for the arrangement of the loan.

Down Payment

* Your down payment is what you can afford to pay today. The larger the down payment you can make, the smaller the loan you have to take out. That large down payment may even secure you a more favorable interest rate.
* While there are many financing deals for cars that don't require a down payment, it is in your best interest to pay for as much of the car as you can up-front. BankRate.com recommends paying at least 20% of the car's purchase price as a down payment.

Example

* Here's an example of how the math on your auto loan is done:
* If you take out a $15,000 auto loan from your credit union with a 7.5% APR to be repaid over four years, you will owe $362.69 every month. Over a year, those payments would total $4,352,28. Over the life of the loan, you'll end up paying $17,409.12. That's $2,409.12 in interest over the life of the loan.
* Don't want to do the math yourself? Check out The Motley Fool's Monthly Payment calculator.