What a car loan is and how it works – Bankrate.com | Eurica Project

If you want to get behind the wheel of a vehicle, you must first take care of vehicle financing. A car loan is simply money that you borrow to pay for the vehicle. There are a number of options when it comes to car loans, so understanding the process is important in order to get the best possible car loan.

What is a car loan

A car loan allows you to borrow money from a lender and use that money to buy a car. You have to pay back the loan in fixed installments over a set period of time, and interest is paid on the money you borrow.

Lenders typically require borrowers to have good or excellent credit in order to obtain favorable interest rates. Your credit rating is also a factor in determining the initial loan amount. If you have good credit, you may qualify for a lower interest rate, which can save you money over time.

This is how car loans work

Car loans come in a few varieties, including dealer financing, car loans from banks or credit unions, and loans from online lenders. Which type of loan is best for you depends on factors such as your creditworthiness, the loan amount and the vehicle you want.

Dealer Financing

Dealer financing is the easiest type of loan because you can do your shopping and financing in one place. The dealer will likely check your creditworthiness. If you have a strong credit history, you may qualify for a special manufacturer price by going through a certified dealer.

However, dealer financing tends to come with a higher interest rate. This is because merchants often earn a commission when they match you with funding from a bank or credit union.

Car loan from bank or credit union

You can also apply for a car loan from a traditional bank or credit union. These loans are funded by the lender, so you don’t have to go through a dealer. However, it may take longer than going through a retailer. Expect it to take at least a business day to get a loan from a bank or credit union, up to a week.

Lenders often have minimum and maximum loan amounts, so make sure the lenders you seek offer the amount you need for your new car.

car loan online

You can also apply for a car loan online. These loans are often processed remotely, but the steps are similar to getting a car loan from a bank or credit union. It can take as little as one business day to be approved.

How to compare car loans

Similar to comparing mortgages, the best way to compare car loans is to look at the key costs β€” including the interest rate, term, and fees β€” along with the estimated monthly payment.

interest rate

The interest rate is one of the most important numbers when deciding on a loan. The installment depends on your creditworthiness, your income and the term and amount of the loan. If you’re looking for a longer-term loan, expect a higher interest rate. When your credit score is higher, you have access to better rates. The lender also takes additional fees into account, so check the structure of the loan.


As you would expect with any loan, the loan term will be a set number of months. If you’re planning to buy a new car and keep it for a long time, taking out a longer-term loan can secure you a lower monthly rate – but you’ll be paying more interest over time. To save that money, take out a shorter term. Just make sure the payments are within your budget.


Think of your car loan fees like any other fees you pay to buy a car. The two main fees that you need to check include the creation fee and the documentation fee. The processing fee is the amount you pay to secure the loan. The documentation fee covers the lender’s cost of securing your loan.

How to get a car loan

The key to securing a car loan is to be prepared with your finances and look around for interest rates. You should also go to a dealer with a pre-approved loan option.

1. Do your homework

Don’t wait until you’re ready to buy a car to learn about car loans. Start with the basics, e.g. B. how high your credit rating is and what your current financial situation is.
This includes knowing your budget well so you can get a feel for what car you can afford. Check your credit reports – Non-mortgage debt and arrears aren’t the only factors hurting your credit score.

You should also research the average interest rate and monthly payments for different car makes and models. Think about how long you want to keep your car and whether you can afford it new or used.

Bank rate tip: Use an online car loan calculator to estimate your monthly payments and available interest rates based on the car you are considering and your credit profile.

2. Get pre-approved

Once you’ve found a car you like and saved the money for a down payment, you can go to a dealership knowing exactly how much you can afford. It also helps to get pre-approved for a loan. This involves filling out forms with banks, credit unions, or online lenders to get an idea of ​​the interest rates they can offer you.

Bank rate tip: If you apply for pre-approval, you often only have a minimum of 30 days to shop afterwards. During this time you can find the car that best suits your needs.

3. Shop around

Once you’ve secured a loan, it’s time to start looking for a car, including at the dealership. It’s a good idea to compare with the numbers you were given, which include the interest rate, monthly payment, amount, and repayment term.
It’s currently difficult to come up with anything under the sticker price, but that doesn’t mean you shouldn’t try to bargain.

Bank rate tip: When looking at vehicles, look out for sellers who are pressuring you into doing a deal that doesn’t serve you. Never be afraid to walk away from a bad deal.

4. Make the deal

Once you’ve found the car you want, ask about the dealer’s financing offer and compare it to the offers they’ve already made. Don’t rush signing paperwork and read everything you sign.

Bankrate Tip: Beware of merchant add-ons you don’t need. Often you can avoid them altogether or get them outside of the dealership for a lot less.

The final result

A car loan is simply an agreement between the lender and you, the borrower, that allows you to borrow money to purchase a vehicle for an agreed term. While the process of getting a car loan can be more complex than a personal loan, it is still possible to do it yourself and get a good deal.

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