Most car buyers need auto loans to purchase cars or other vehicles. Consumers who are in the market for a car should prepare themselves with accurate information about the different types of loans and where to go to apply. Credit rating and interest are also factors to consider before applying for a car loan.
Being prepared ahead of time may increase the chances of getting approval for automobile financing. In this article, we will cover the following subjects about auto loans:
Before committing to paying off an auto loan, it is a good idea to think about the time it will take to fulfill the obligation. Since most new or used vehicles are expensive, it could take years to pay off an automobile loan. Here are a few facts and figures about securing auto loans:
Although each case is different, these figures provide a general idea of what to expect. The time to pay off an automobile loan will vary depending on several factors which will be discussed in this article.
Car loans fall into the category of secured loans. A secured loan means that the borrower uses property as the collateral. If the debt is not paid, the lender can take back the collateral (which would be the vehicle in an auto loan).
Other types of secured loans are mortgage loans, in which the house is the secured property. With unsecured loans, If the borrower defaults (does not pay), the lender does not have property to repossess. Examples of unsecured loans are credit cards, personal loans, and retail credit. Unpaid debt from unsecured loans is usually collected by lawsuit.
Two types of vehicle loans are:
There are several options for auto financing, such as:
Some homeowners secure home equity loans to finance their automobile purchase. The lender approves them to borrow against the equity (basically, the value of the paid portion of the home loan). There may also be tax advantages to securing a home equity loan.
Whether a borrower is applying for a secure loan or unsecured loan, their credit score will determine:
1. Whether or not the loan is approved
2. How much credit will be approved
3. The interest rate charged by the lender
If a borrower has a low credit score it can mean that any request for secured or unsecured credit is denied. Lenders may not be willing to take a risk with a borrower with bad credit. However, with creative financing that is now available, people with low credit scores can often get approval for car loans.
According to some financial experts, a credit score under 550 is considered bad credit. A higher score, around 640, is considered average. Credit in the 700+ range is rated good by most lenders. Any number over 750 puts a borrower well on their way to very good and excellent credit once the 800 mark is met.
It is always a good idea to work toward improving creditworthiness. Among the advantages to individuals with good credit are:
Although it is possible to buy a car with bad credit, there are financial consequences. Lenders may also require an enormous down payment, co-signer, or other terms in exchange for an approval. People with bad credit can expect a much higher rate of interest. By the time the vehicle loan is paid off, the borrower may have paid thousands of extra dollars.
Interest is the money paid back in addition to the cost of the vehicle. It is the amount that lenders charge for the use of their money. The interest rate for a car loan may greatly vary, as we discussed in the section concerning how credit score affects auto loan approval. The majority of car loans are paid back with simple interest loans. Here is an example of a car payment with simple interest:
This borrower has a credit score of 598. He gets approved for a car loan through a very small car dealership with in-house financing. The car costs 10,000. His payments are spread out over 4 years. His interest rate is 20 percent. If he does not place a down payment, his first car note will be something like this:
With this type of loan, interest is only paid on the balance owed. As the principal is reduced, so is the interest portion of the car payment. Notice the borrower is paying, over time, $2000 more than the cost of the car as interest payment to the lender.
This is just a very basic version of how a simple interest car loan can work. It is important to speak to lenders to get the exact terms and conditions of a specific auto loan, including late fees and other charges.
It is very common today for people to lease a car rather than purchase a vehicle. It is said that 30 percent of new vehicles are leased. Both options have similarities, such as monthly payments and the potential for denial if the buyer has bad credit. Some of the differences between the two options include:
Several other factors will help a borrower decide what is exactly right for their situation when it comes to leasing a car. The best advice for consumers who need help securing auto loans, want an understanding how interest works, or to learn how credit rating affects auto loan approval, is to continue to research and ask questions before thinking of signing on the dotted line.