Its always best to educate yourself on loan terms before signing a loan contract or even searching for a car loan. This article explains some common automobile financing terms so you know what youre looking at when comparing car loans:

Interest Rate

This is the rate of interest youll be charged on the amount of money you borrow. Interest rates can be fixed or variable. Fixed interest rates are set at one amount for the life of the loan. Variable interest rates fluctuate depending on the prime rate. So, if you have an interest rate that is set at prime plus two points, and the prime rate is at 3%, then your interest rate will be 5%. If the prime rate goes up, so will your interest rate. If the prime rate goes down, so will your interest rate. Fixed rates do not change. They are constant through the life of your loan.

Pre-Payment Penalties

Pre-payment penalties are penalties that you are charged if you pay your loan balance off in a shorter time than originally negotiated. So, if you make monthly payments greater than what youre charged, or if you refinance your car loan, you will be charged a certain amount that was determined when you signed your contract.

Loan Term

This is the amount of time that your loan will last. For example, if you borrow $10,000 on a four-year loan term, you will have to pay that amount back plus interest in four years. Most car loan terms are somewhere between two and five years.

Car Insurance Clause

Most lenders require that you keep full-coverage car insurance on any car that is financed. This way, if the car was totaled, you would receive the necessary amount in order to pay back the financing company. Because a cars value quickly deteriorates, its advisable to get insurance that pays back the full amount of your loan. Otherwise, your insurance company may just pay back the value of your car, which may not be enough to pay off your loan. Youll then be stuck with a loan payment on a car you no longer have.