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    What is a Vehicle Loan?

    Jenna Taubel

    Jenna Taubel About The Author

    Jul 16, 2019 7:45:00 AM

    If you’ve never purchased a vehicle using a loan before it can be a little overwhelming trying to understand what you’re getting yourself into. While the concept of a vehicle loan is actually fairly simple, it can get confusing when you start hearing all the key terms and phrases that define a vehicle loan. To help you understand what a vehicle loan is we will briefly outline an auto loan’s key components.

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    What is an Auto Loan?

    An auto loan, also known as a vehicle loan or car loan, is the sum of money you borrow, either from a credit union or bank, for the sole purpose of purchasing a car, truck, or other type of vehicle. You then agree to pay back the money you borrowed, with a slight markup included, over an extended period of time.

    Easy, right? You borrow money for a car from your bank or credit union, and then pay it back over time. Where things tend to become less clear for people, when it comes to understanding an auto loan, is the financial jargon that gets tossed around on every vehicle lending website. So next we are going to define the important car loan lingo you need to know.

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    How a Vehicle Loan Works

    When it comes to vehicle loans, there is a lot of vocabulary that you may have never heard of before, or maybe you’ve heard it but still don’t quite understand it. The best way to way to understand what a vehicle loan is and how it works is to understand these various words.

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    The four main parts of a vehicle loan are the principle amount, loan term, annual percentage rate, and monthly payment. Let’s define each of these terms separately.

    Principle Amount

    The principle amount is the total sum of money you borrow from the bank or credit union to purchase your car.

    Loan Term

    The loan term is the amount of time you agree to pay the principle amount back within. It’s usually scheduled in monthly increments ranging from 12 to 60 months (or 1 to 5 years).

    Annual Percentage Rate

    The Annual Percentage Rate, or APR, is the rate the bank or credit union will charge you to borrow money from them to purchase your vehicle. It is also often referred to as the interest rate. You will generally see the APR listed as a percentage, such as 2.49% or 5.75%. A lower interest rate is preferred. The interest rate that will be applied to your vehicle loan will be based on your credit score, which you can learn about here.

    Monthly Payment

    This is the amount of money you need to pay each month to the credit union or bank until you’ve paid back the principle amount in full. To determine your monthly payment for an auto loan, you’ll need to know the principle, term, and APR. You can use online vehicle loan calculators like this one to help you determine your monthly payment.

    Financing a Vehicle with a Loan at First Alliance Credit Union

    If you choose to finance your next vehicle with an auto loan it will be important that you take time to compare your vehicle loan options. Each financial institution will charge different interest rates and offer a variety of loan terms. The interest rate and the loan term will have a large effect on your monthly payment, so pay attention to those with different banks and credit unions to ensure you are getting the best vehicle loan for you.

    If you still have questions about how a vehicle loan works or have other auto loan questions, feel free to reach out to the Lending Advisors at First Alliance Credit Union. We are happy to offer free, personalized financial guidance and answer any questions you have, no matter how big or small they are.

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    We do our best to provide helpful information but we cannot guarantee the accuracy or completeness of the information presented in the article, under no circumstance does the information provided constitute legal advice. You are responsible for independently verifying the information if you intend to use it in any way. Additionally, the content is not intended to be reflective of First Alliance Credit Union’s products or services, for accurate and complete details about our product and service information you must speak to an advisor at First Alliance Credit Union.