3 Financing Terms You Need to Know BEFORE Buying a Car

Are you about to buy your first car? Or maybe this isn't your first time at the dealership, but it is your first time taking out a loan. Whatever the case, the financing office can be one of the most intimidating places on the car lot. Fortunately, getting a car loan isn't as complicated as it seems at first glance, and you can up your confidence by learning a bit about the process.

While you're probably familiar with the basics of down payments and monthly payments, there may be a few more esoteric terms that leave you scratching your head. If you're not up to speed on financing lingo, check out these three terms that you should know before you start planning for your new car loan.

1. Loan-to-Value Ratio

Your lender will consider numerous factors when determining the rate they offer you on your new loan. Along with the total value of the loan and your loan term, your interest rate will have the most substantial impact on your monthly payments. The loan-to-value (LTV) ratio is one of the factors that may impact your lender's offer.

The LTV tells you the loan value relative to the car's value. In other words, an $8,000 loan on a $10,000 car would produce an LTV of 80% since you have a loan for 80% of the car's total value. A higher LTV may lead to higher interest rates, and you can reduce your LTV with a larger down payment. If you're having trouble getting approved for a loan, lowering your LTV may improve your odds.

2. Total Cost

Your total cost is the amount you'll pay for your car once you complete the terms of your loan. This cost includes your loan principal and loan interest. Although it's easy to focus on your monthly payment, it's always worthwhile to consider the total cost of any loan. Extending the term of your loan typically leads to a higher total cost, even though it may reduce your monthly payments.

Remember that there are no hard and fast rules for affordability, but it's always a good idea to consider every aspect of your car purchase. Make sure you're not ignoring the total cost of your loan while focusing on other, shorter-term factors.

3. Gap Insurance

Gap insurance is something you may not have considered before if you've never financed a car. Automotive gap insurance pays the difference between your car's depreciated value and your loan amount in the event of an accident. This coverage can help ensure that you're not left holding a loan for a vehicle that's no longer drivable.

This insurance isn't required, but it's an extra expense that's worth considering. If you're planning to purchase gap insurance, make sure you fit it into your budget when calculating the highest monthly payment you can afford.

To find out more, contact a company like On-Trac Auto Sales.