A new car is a major purchase. As of January 2022, the average cost of a new car in the United States is over $47,000. There is no reason to believe that prices won’t continue to rise as they have over the past few years.

Most people don’t have that much cash lying around. If you’re in the market for a new vehicle, odds are you’ll have to take out a car loan to pay for it.

This may be your first time doing so. If it is, this overview will explain what you need to know about the basics of car loans.

What is a car loan?

You can take out a car loan to purchase a new car or a used one. You will typically receive a car loan in the form of a lump sum from a financial institution, such as a bank.

You will have to pay back this loan over time. The lender makes money by charging interest and additional fees.

Although you are free to drive a car that you purchased with the help of a car loan, until you completely repay the loan, the title will be in the lender’s name. That means the lender could repossess the car if you fail to consistently make payments.

What factors affect car loan monthly payments?

Three critical factors influence how much a monthly payment for a car loan will be. They are:

  • The amount of money that you borrowed
  • The annual percentage rate (APR), which is essentially the extra money you will pay for taking a out a loan in the form of interest and fees
  • The loan term

Naturally, the less money you have to borrow when taking out a car loan, the lower your monthly payments will be. This is why you need to carefully consider both your current and potential future financial circumstances when buying a vehicle. For example, if you are willing and able to make a substantial down payment on a car, this can reduce the amount of money you need to borrow when taken alone. You may therefore save money in the long run because your monthly loan payments won’t be as hefty and your loan term may be short. However, you must of course avoid making a very large down payment if doing so will put you in dire financial straits.

It’s also very important to do your research when applying for car loans. You should not always take out a loan with the first lender you find who approves one. For instance, with a little bit of searching, you might find a lender who is willing to offer the same loan amount with a lower APR. This will translate to long-term savings.

Additionally, the length of your loan term will affect how much you may have to pay on a month-to-month basis and how much you will end up paying in the long run. Perhaps you can reduce monthly payments on a four-year loan by extending the term to five years. Although this may be necessary if your ability to make higher monthly payments is in question, because you will be paying more interest, a five-year term may result in you paying more over time.

How can you get a car loan?

You have a few options from which to choose when applying for a car loan. Again, financial institutions like banks, credit unions, and other lenders may offer car loans directly. You can review your options to find which one that’s ideal for your needs and circumstances.

However, maybe you don’t have ideal credit. This could make it difficult to get approval for a car loan. Or, you might merely want to simplify the process of financing your vehicle.

If so, you may also have the option of taking advantage of a dealership’s in-house financing. It’s not uncommon for car dealerships to offer financing options via multiple lenders, ensuring customers still have the opportunity to compare various loans.

That said, you need to exercise care when working through a dealership. Some dealerships offer financing options to customers with poor credit. While these types of loans may appeal to someone who is struggling to get approval because of their credit history, they loans often come with high interest rates.

None of this is meant to overwhelm or intimidate you. It’s simply meant to help you understand that doing your homework and taking time to evaluate your choices is smart when taking a car loan. If you’re willing to spend time conducting research now, you could ultimately save yourself a lot of money.


Start rounding up and saving to pay down your car loan faster