Before you head out and apply for auto financing, learn the terms associated with the process.
Car Loan
This is a contract between you and a lender. The lender provides cash to help you buy a new or a used car, and you agree to pay them back over time with interest. Some lenders also charge a fee to provide the loan. Until you repay the loan entirely, the title of the car will be held by the lender.
Interest
This is the cost of borrowing money. The interest rate also called the annual percentage rate, or APR covers the lender’s costs, risks, and profit margin. This rate depends on your personal credit history, the loan duration, and the type of car you’re buying. The interest rate will also differ from lender to lender.
Loan Term
This is the length of the auto loan and is usually counted in months. The most common loan terms used to be 36 or 48 months. But as cars today are more expensive, loan terms of 60 to 72 months are also becoming normal. But longer terms usually carry a higher risk for lenders and therefore have higher interest rates. Ideally, you want to keep the term as short as possible. That way, you get debt-free sooner.
Principal
The principal is the amount of the loan left to pay. In the beginning, the entire amount is the principal. With each payment, the principal reduces. Remember, a part of the payment goes towards interest, and the rest goes to the principal.
Down Payment
This is the amount you put down upfront towards the purchase of the car. It can be a cash payment or the trade-in value of your current vehicle, or both. The larger the down payment, the smaller your loan amount. You also get a better interest rate with a larger down payment as the lender believes you to be less of a risk.
Monthly Payment or EMI
This is the payment you will make every month towards repayment of the principal and the interest on it. The amount is the same every month and is due on a specific date. Remember to calculate the total cost of the car and not just the monthly payment amount.
