Thinking about buying a new car? If so, you might be contemplating whether to take out a car loan or not. Before you start comparing interest rates and loan terms, get to know more about what a car loan is, how they can affect your credit score and more.
A car loan is a form of personal loan that is used to purchase a vehicle, such as a car or a motorcycle. This type of loan may be taken out when purchasing a new vehicle or a used vehicle and can vary in value. In addition to the amount of money borrowed, known as the principal, borrowers also pay interest.
There are several different places where you can apply for a car loan. The most common include banks, credit unions, building societies and peer-to-peer lenders. Some car dealerships also provide finance options. At ClearScore, we providethat are tailored to your credit score, so you will be more likely to be accepted for the offers you apply for.
Depending on the lender, a car loan may be either secured or unsecured. A secured car loan uses the vehicle as a form of security for the lender, allowing them to repossess and sell the vehicle if you fail to repay your loan. Providing a stronger guarantee that the lender will get their money back, this type of car loan is generally accompanied by lower interest rates. Unsecured loans, on the other hand, do not provide the lender with any form of security, meaning that the interest charged throughout the loan term may be higher.
The amount of money you’ll be able to borrow will vary depending on your personal circumstances. Lenders typically assess your credit history, your income and other factors to determine how much money they will be comfortable lending you.
The amount you’ll pay each month will vary depending on several different factors. The total amount you borrow will be one of the most influential, but the loan term will decide what portion of the total amount you’ll pay each month. A large loan will have more expensive monthly repayments, while a short loan term will also see you paying more each month than if you were to have a longer loan term. On top of the original amount you borrow, you’ll also pay interest.
There are plenty of car loan calculators available online that will allow you to enter the amount you intend to borrow, your loan term and your interest rate, generating an estimated monthly repayment.
When you apply for a car loan, you’ll need to consider more than just the amount you intend to borrow. You’ll also need to think about how much interest you will be charged over the loan term. Interest is typically calculated as a portion of the sum you borrow and is generally displayed as a percentage figure by lenders. As you pay off more of your car loan, the amount of interest you’ll need to pay will remain proportionate to how much money you owe.
You can calculate how much interest you will owe using manual formulas, but there are plenty of car loan interest calculators available online that can do the job for you. Look for a calculator that allows you to enter the amount you’ll be borrowing, your interest rate and your loan term.
The amount of time you’ll have to pay off your car loan, also known as the loan term, can vary depending on the lender you choose and how much you end up borrowing. On average, most car loans have a loan term of three to five years, but the term may be shorter or longer. A shorter loan term typically attracts lower interest rates, while longer loan terms will generally see you make smaller monthly repayments but pay more in total over time.
Paying off your car loan early can be a great way to save yourself some money in the long run. That being said, not all lenders will allow you to pay off your loan before the loan term ends without additional fees and charges. Before you take out a car loan, be sure to check whether the lenders you’re considering will charge you more for paying off your loan ahead of time. In some cases, the amount charged will end up being more than you would have paid if you had followed the standard repayment schedule.
It may be surprising, but simply applying for a car loan can affect your credit score. Every time a lender accesses your credit information, an enquiry will be recorded on your credit report and your score will lower slightly. This is normal and shouldn’t be cause for concern. When you first take out a car loan, you may also see a slight dip in your credit score, but it should start to rise again as you start making your repayments. If you fail to pay your agreed weekly, fortnightly or monthly repayments, you could potentially default on your loan, which will have a greater negative impact on your credit score. If you do find that you are having trouble meeting your financial obligations, chat to your lender about getting an extension on your repayments to avoid any negative effects on your credit score.
Although taking out a car loan won’t see your credit score magically improve, making regular repayments can help to build a positive credit history. As you continue to meet your financial obligations throughout the life of your loan, your credit score may also improve. It’s important to remember that failing to make your repayments or defaulting on your loan could have a negative impact on both your credit score and credit history.
Whether a car loan is worth it or not depends on your circumstances. Car loans will generally see you pay more for your vehicle over the loan term, but they can allow you to buy a car when the need arises, even if you haven’t saved enough to purchase one outright. If you have the financial means to make regular loan repayments, a car loan can make it easier to incorporate the cost of a vehicle into your monthly budget but there is a risk that if you fail to make your repayments, you could default on your loan. As with any financial product, it’s important to weigh up the pros and cons of a car loan before committing.