Getting an auto loan can feel overwhelming, especially with all the financial jargon thrown around. But don’t worry, we’re breaking down 10 common auto loan terms so you can feel confident and informed when financing your next vehicle.
1. Annual Percentage Rate (APR)
APR is the total cost of borrowing money for your car, expressed as a percentage. It includes both the interest rate and any fees charged by the lender. A lower APR means you'll pay less over the life of the loan.
Example: If you borrow $20,000 at a 5% APR for five years, you’ll pay around $2,645 in interest over the life of the loan.
2. Loan Term
The loan term is the number of months you agree to repay your auto loan. Auto loan terms typically range from 24 to 84 months.
Tip: A longer loan term typically means lower monthly payments but higher overall interest costs. A shorter term saves money on interest but increases your monthly payment.
3. Down Payment
This is the upfront amount you pay when purchasing your vehicle. A higher down payment reduces the amount you need to finance and can lower your interest rate.
Example: If you buy a $30,000 car and put down $5,000, you only need a loan for $25,000, reducing your monthly payments.
4. Principal
The principal is the amount you finance (the price of the car minus your down payment and positive trade-in value). Interest is calculated based on this amount.
Example: If you finance $25,000, your monthly payment will be calculated based on this amount plus your interest rate.
5. Interest Rate
This is the percentage of the loan amount the lender charges for borrowing money. Interest rates can vary based on factors such as your credit score, loan term, and the lender’s policies.
Tip: A good credit score can help you qualify for a lower interest rate, saving you hundreds or even thousands over the life of the loan.
6. Pre-Approval
Getting pre-approved means a lender has reviewed your credit and income to estimate how much you can borrow. This gives you a clear budget and negotiating power when shopping for a car.
Benefit: Pre-approval can help you avoid surprises – and streamlines the buying process at the dealership.
7. Refinancing
Refinancing means replacing your current auto loan with a new one, usually to get a lower interest rate or monthly payment. Most loans can be refinanced.
Example: If you took out an auto loan at a high interest rate and your credit score has improved, refinancing could save you money on interest.
8. GAP Insurance
Guaranteed Asset Protection (GAP) insurance covers the difference between what you owe on the loan and the car’s actual value if it’s totaled or stolen.
Example: If your car is worth $15,000 but you still owe $18,000, GAP insurance can cover the $3,000 difference if your car gets stolen or completely wrecked.
9. Trade-In Value
If you have a car to trade in, the dealer will assess its value and apply it toward your new vehicle’s purchase price.
Tip: Check sites like Kelley Blue Book or Edmunds to estimate your car’s trade-in value before heading to the dealership.
10. Balloon Payment
Some auto loans come with lower monthly payments but require a large lump sum (balloon payment) at the end of the term.
Warning: If you’re not prepared to make the balloon payment, you may need to refinance or sell the car.
Financing with NWCU? We’ve Got You Covered!
Northwest Community Credit Union offers affordable auto loans designed to fit your budget. Get pre-approved and drive off in your new car with peace of mind. Learn more about NWCU auto loans!
*All loans subject to approval. Loan rates will be based on applicant’s credit history and may be higher. Rates and terms are subject to change without notice. Interest accrues during the initial 90-day no payment period. For details and additional rates, please contact Northwest Community Credit Union at (800) 452-9515.