You may have set your eyes on a new car and may have done a lot of research to find that car. If the only way to finance the car you want to buy is a car loan, it needs research to pick out a car loan that suits your requirements. Like any other loan, when you apply for a car loan from a financial institution like a bank or credit union, you receive your money in a lump sum, and then you’re required to pay it back monthly, with interest, over time.

This monthly amount depends on the amount you’ve borrowed, the duration fixed to pay it back, and the interest rate applicable. Let’s look at these factors in detail:

1. Loan amount

This is usually equal to the worth of the car, but it may also be significantly less, depending on whether you have a vehicle to trade-in and/or are making a down payment.

2. Annual percentage rate

Also called the APR, this is the effective interest rate you pay on your loan. This percentage depends on a variety of factors, but the most important one is your credit score or your creditworthiness. A higher credit score often means a lower percentage.

3. Loan term

The time within which the loan amount needs to be paid back, which typically ranges from 36–72 months. A lower monthly payment is only good if the deduction is made on the loan amount and not by increasing the loan term. On the other hand, a lower APR is always preferable. A shorter loan term may mean a higher monthly amount and increases the risk of missing payments, but it may be better than a longer loan term where the total amount paid becomes much more than the actual value of the car.

4. Important questions to ask your lender

When you pick out an auto loan, you need to pick one that works best for you. This may require tweaking the 3 above-mentioned factors to find the right balance. This often involves looking at the bigger financial picture and asking the right questions:

• How does it affect you in the short term?
• How will it affect you in the long run?
• What are the chances of you missing out on your monthly payments?

5. Personal circumstances

As mentioned, when it comes to car loans, there is no clear solution for everyone. The ideal loan will vary from person to person depending on their financial circumstances. Some people will be suited for a loan with a longer term so as to reduce their monthly payments and use the difference to pay down debt with higher interest rates, while others will prefer a higher monthly payment and pay off the loan sooner.

You need to invest time to understand car loans, be clear about your financial situation, work on your options, and select the one that you will be able to pay off without accumulating late fees and missing payments. You can also save by refinancing in the case of an existing car loan.