Auto Loans

Probably one of the most common types of loans taken out today are auto loans. As the name suggests, this is the kind of loan you look for when you want to buy a new or used car.

Many people organise finance directly with the dealer. However, this might not always be the best option and you may be able to get a much better deal through a bank or other kind of lender.

How Auto Loans Work

Auto loans work much like most other kinds of loans. They are, generally speaking, fixed rate loans. This means that your interest rate, or APR, as well as your monthly payments, will stay the same throughout the duration of the loan. This can be a nice feature as it means you have certainty over your monthly payments from month to month and, even if interest rates go up, you know that the interest rate on your loan will stay the same.

You will find that a number of different lengths of loan are often available. You can choose to pay the loan off over as little as 1 to 2 years, or you can choose lower payments and a longer term loan. Many banks now offer auto loans with terms of up to 8 years. Don't forget that the longer your loan is for, the more interest you will pay over time. Also bear in mind how long you think you will keep your car. If you plan to get a replacement in just 3 years, you may not want to get a loan that is spread over the course of 5 years.

Things to look out for

Don't forget to look for any fees before taking out a loan. There may, for example, be loan arrangement fees and you should be aware of these before you sign anything so there are no nasty surprises.

You might also want to look out for any pre-payment penalties. Paying a little extra each month off your loan, or making an extra lump sum payment, can save you a lot of money in interest. However, some loans will charge penalties for this. If you think you might be interested in making extra payments, check the details of your loan to see if there will be any penalties.