Getting a Car Loan: Key Terms to Know

March 6, 2023 |

By Jennifer Tucker

Posted in: Car Buying

3 Min. Read

Auto Loans 101: What You Need to Know Before Borrowing

If you’re searching for a new set of wheels, you might be wondering, “What should I know before I buy?”

You may have already done your research on car options and found your dream ride. But moving forward with a purchase most likely means getting a loan.

Understanding how auto loans work will help you determine what makes the most sense for you. We can help by explaining what an auto loan is, how a car loan works, and key terms to know.

Car Loans and How They Work

What is an Auto Loan?

An auto loan is a type of financing that can help you buy a car when you don’t have the cash to make such a big purchase. A car loan can be used to fund a new or used vehicle. When you get an auto loan, you borrow money from a lender and agree to pay back the funds over a set period of time with interest and fees.

Learn about What to Look for in a Car Loan.

How Does a Car Loan Work?

Auto loans are similar to other types of loans you might be familiar with, like a personal loan or a mortgage. When you take out a car loan, you will pay the lender back in equal monthly installments (referred to as loan payments or monthly payments). Your monthly loan payment will include both principal and interest and the amount will depend on a few factors:

The total amount of the loan
The interest rate (or APR)
The loan term

A car loan calculator can help you determine the cost of a loan and decide what you can afford. Marine Credit Union offers a variety of free budgeting and financial planning tools to help you on your lending journey, including a Car Loan Calculator and a Car Payment Calculator.

Key Auto Loan Terms to Know

Here are the most common terms you’ll likely hear when you’re shopping for a car and applying for an auto loan:

Annual Percentage Rate (APR)

APR is the amount of interest and fees you’ll pay to borrow money to purchase a car, given as a yearly percentage.

Down Payment

Your down payment is the amount you’ll pay upfront toward the cost of your car. It may be cash, the value of your vehicle trade-in, or both.

Loan Term

The loan term is also sometimes called loan duration. This is the length of time you have to pay off your loan.

Monthly Payment

Your monthly payment is the amount you will owe on your car loan each month. It includes principal, interest, and other fees that might apply.

Principal

Principal is the loan amount you’re borrowing, minus any fees, penalties, interest, or other costs associated with your auto loan.

Total Cost

Total cost is the full loan amount—including principal and interest—that you’ll pay over the life of your auto loan.

How to Get a Loan and Buy a Car

Buying a car can be tricky, especially if it’s your first time owning a vehicle. There are a lot of things to consider when it comes to identifying the right car to meet your needs and the right car loan for your financial situation. This comprehensive guide walks you through the essential steps involved in buying a car: Car Buying Made Simple: How to Find the Right Car and Get the Best Deal.

All loans subject to Marine’s approval process. Membership eligibility required. Federally insured by NCUA. Equal Housing Lender.

Frequently Asked Questions: Getting a Car Loan

Whether or not you choose to get a loan to fund a major purchase like a car will depend on your personal financial situation. Financing a car may be a good idea when:

You need a vehicle, but you’re unable to pay for it in cash.
You’re able to lock in a low interest rate, so you won’t add too much to the overall cost of the car.
Your monthly loan payment will be reasonable and won’t add stress to your budget.
You’re certain you can make the loan payments on time.

The choice you make to get an auto loan from a bank or a dealership depends on the loan terms available and how they meet your needs in your financial situation. Aside from getting an auto loan, you can also consider funding the purchase of a car by leasing or paying with cash.

A personal loan is best for financing large, one-time expenses like a home improvement project. An auto loan is used specifically to finance the purchase of a car. You can use a personal loan to finance a new or used car, but it isn’t recommended. An auto loan is a better option that is often easier to qualify for and comes with a lower interest rate. Plus, with an auto loan, the car is used as collateral, which protects your other assets.

A car loan can help you purchase either a new or used vehicle. In some cases, new vehicle loans have lower rates than used car loans. New car loans may also come with special incentives that could reduce your monthly payments. Choosing the car—and the loan—that’s right for you depends on your individual needs.

The qualifications for an auto loan are similar to the qualifications for other types of financing. The general factors that lenders consider when you apply for a car loan include your credit score, debt-to-income ratio, down payment amount, and more.

When it comes to financing a car, you have options. The most common ways that people fund the purchase of a new vehicle include: Getting an auto loan, leasing a car, and paying with cash. How you choose to pay for or finance your car depends on your goals and your personal financial situation.

Jennifer Tucker
Jennifer Tucker is a freelance writer for Marine Credit Union. She has held roles in banking, marketing, and public relations during her 15+ year career. She holds a bachelor’s degree in communication with a minor in journalism from the University of Portland and a master’s degree in communication from Marquette University.