A car loan is a financial arrangement between the borrower and lender to finance the purchase of an automobile. The lender becomes the lienholder on the vehicle title and holds it until the debt is paid in full. Many people rely on an auto loan to get the new or used car they need to get around. It’s important to consider all the factors that go into making an informed decision about a car loan. Before applying for a loan, it is a good idea to know what you can afford and make an effort to establish an auto-buying budget. You can use loan calculators to estimate what your monthly payments will be based on different purchase prices, interest rates, down payments and loan terms.
The history of the Car Loan can be traced back to 1919, when General Motors established its credit division, GM Acceptance Corporation (GMAC). GMAC was one of several financing companies created by automotive manufacturers to meet demand for new and used cars during World War I. During the first half of the 20th century, most American consumers paid cash for their automobiles, but by the end of the decade, GMAC and its competitors were offering car loans to make the vehicles more affordable.
When a borrower applies for an auto loan, the lender typically starts by specifying how much money the borrower wants to borrow and reviewing the borrower’s credit report. Then the lender will usually ask for documentation of income, such as a pay stub or tax return. The lender will also verify the borrower’s employment, and may require a down payment.
Auto loan rates can vary widely based on the type of vehicle you’re purchasing and the borrower’s credit score. Getting a co-signer, looking for a vehicle that’s newer and/or choosing a shorter auto loan term can help reduce the cost of the loan. The lender will likely have year and mileage limits for the vehicle, too.
Borrowers with low credit scores often face higher rates than those with high scores. But there are ways to reduce the costs of an auto loan, including seeking a co-signer or looking for lenders that specialize in working with subprime borrowers. It’s also a good idea to make a large down payment on the vehicle, which can help lower your overall borrowing costs and reduce the amount of time you spend paying off the loan.
Ultimately, the best way to find a good deal on a car loan is to shop with direct lenders. These include banks, credit unions and online lenders. They’ll give you the opportunity to comparison-shop for auto loan terms, and some even let you get preapproved so you can shop with confidence. It’s also important to read all the fine print and make sure you understand all of the terms of your agreement. If you’re unsure of anything, be sure to ask questions.