If you've considered taking out an auto loan, you've probably got a lot of questions. How do they work? Who can get one? What are the requirements? This helpful guide on auto loans will answer all these questions and more.
The article breaks down the most commonly asked questions into easy-to-understand chunks so that you can find the answers you need quickly and easily.
How Does an Auto Loan Differ From a Lease?
An auto loan is a type of loan specifically used to finance the purchase of a car. It is usually secured against the car's value, meaning that if you default on your loan payments, the lender has the right to repossess your vehicle.
Leasing is different from buying with an auto loan, as leasing requires you to make payments towards the cost of the car itself rather than paying off the entire amount. Here, you will make payments for the length of your lease term, and at the end, you are allowed to return the vehicle to the dealership or buy it outright.
Auto loans are offered by banks, credit unions, and other financial institutions. Depending on the lender, you may need to put down a deposit to secure the loan. A lease, however, is typically offered directly through the car dealership, and you do not need to place a deposit.
Who Is Eligible for an Auto Loan?
Anyone who meets certain eligibility criteria can apply for an auto loan. Generally speaking, applicants must have good credit scores and sufficient income to make regular loan payments. You might have to provide proof of income, such as a pay slip or tax return.
In addition, applicants must be at least 18 years old. Some lenders may also require proof of insurance before they will approve a loan application. This requirement is to ensure that the car is covered in the event of an accident or theft.
How Much Money Can You Get With an Auto Loan?
The amount that you can borrow depends primarily on two factors –– your credit score and income level. Generally speaking, lenders will offer a certain percentage of a vehicle's total value as a loan amount. So if a lender provides 80% financing and you want to buy a car worth $15,000, then you'll need to come up with at least $3,000 upfront before being approved for financing.
That said, if your credit score and income are high enough, it's possible to get 100 percent financing for some vehicles, but you have to contend with the higher interest rates associated with full-loan financing options.