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Loan Basics
By Jon Acuff
Applying for a loan can be intimidating, so here's a high-level look at some of the basics. You can also read about where you can get a loan and what the benefits are of a loan vs. a lease.
What is a loan?
In the simplest terms, a loan is a way to afford something you want when you don't have the cash to pay for the item outright.
It is a financial agreement through which you borrow an amount of money from a lender with the understanding that you'll pay
it back through regular installments over a set period of time. Unlike a lease, when you complete the terms of your auto loan,
you own the car.
In addition to the amount of money you borrow, your payments will depend on the interest the lender charges you. The money you pay on the price of the car is considered the principal charge. The money you pay on the interest is considered the finance charge. Your monthly payment is comprised of both the principal and finance charges.
How much does a loan cost?
There are several different ways to answer that question. One easy way to figure out the cost is to multiply your monthly
payment by the number of payments you'll make to complete the loan.
For example, let's say you took out a $20,000 loan on an SUV. Your monthly payment is $356 per month. The term of your loan (the length of time you have to pay it off) is 60 months. If you fulfill the requirements of the loan by making equal payments over a five-year period, you will pay $21,360 for the opportunity to borrow $20,000. The additional $1,360 is the interest you paid.
But what about the interest rate? What happens if you put cash down or trade in a car? How do you figure out the monthly payment? To find those answers and others, try our Payment Calculator or Affordability Calculator. You'll get an instant look at the numbers that matter most to you. Or you could use our Purchase vs. Lease Calculator to see the difference between these two popular financing methods.
If you'd like to know more about whether a loan could make sense for you, read 5 Signs You Might Love a Loan. To learn about the lease side of the car financing world, take a look at Leasing Basics.
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