The Cost of a Car Loan

• Car loans are one of the most common types of personal loans. Most people who buy cars will use a car loan to pay for their purchases. Car loan payments are broken into two parts: interest and principal. The principal is the balance on the loan. The interest is the fee you are charged for the privilege of borrowing money. The interest rate, fees and other costs in the loan are expressed as an annual percentage rate, or APR.
  The APR shows you how much you will pay each year for the privilege of borrowing money from the lender. When figuring out how much the loan will cost, keep in mind that most car loans are for five years.
  
  

Options for Car Loans

• When you are looking for a car loan, you have three main options: online car loans, dealership loans or bank loans. Traditionally, car loans came from banks. Today's dealerships are looking to make money on the deal, too, so they also offer financing. Getting a loan from the dealer is convenient, but more expensive. When you get an auto loan from the car dealership, you will pay additional interest. The dealership gets a loan from a bank or other traditional lender, and then adds a few percentage points to the interest rate before offering it to you. In other words, you are paying interest to both the bank and the dealership for the privilege of borrowing money.
  Online loans work the same way as bank loans, but the transaction is handled online instead of in a brick-and-mortar lending office.
  
  

Getting a Car Loan

• When you approach a lender seeking a car loan, the lender will look at your credit report and income to determine whether or not to grant you the loan. The lender wants to make sure that you will be able to pay what you owe. If you have a poor credit rating, you will either be denied the loan or be offered a loan with a very high interest rate.
  You may be asked to put a down payment on the vehicle. This shows the lender that you have some financial responsibility. The more money you can afford to pay upfront for your car, the lower your monthly payments will be, and the less the loan will cost in the long term. If you are approved for a car loan, the lender will pay cash for the vehicle on your behalf, and you will then begin making payments on the loan each month.
  Your car then serves as the security for the loan. If you do not pay what you owe, the bank will repossess your car in order to get the money back.