Understanding Car Loans and Car Loan Rates

When you purchase a vehicle with a loan, a bank or other financial institution pays for most or the entire vehicle up front, and you agree to pay back the money over time.  The amount of money you borrow from the bank is referred to as the principal amount of the loan.  The amount of money you contribute up front is referred to as the down payment.  The down payment on a car loan usually varies from 10% to 20% of the purchase price of the vehicle but is sometimes as low as zero.  A down payment can also be considered in either a trade-in or cash.  You can often purchase a new car without a down payment if you qualify because of your good credit.  Used cars generally require a slightly larger down payment, 20% or more down payment is frequently the norm for used car loans.

The payback period or term for a loan is typically up to five years, although some newer vehicles are being sold with longer-term loans.  New car loan terms are frequently for three years, four years, five years and recently six year car loans are becoming popular.  The five year car loan being the most common.  Used car loans are commonly found with lengths of three years and four years. 

The financial institution, whether it is the manufacturers finance division or bank, will charge interest for your use of their money with the car loan.  Interest rates vary depending on a number of factors such as your credit rating and income.  New car loan rates will be lower than used car loan rates.  Used car loan rates are generally about one percentage point higher than new car loan rates with a similar term.  Manufacturers have frequently offered lower loan rates as a purchasing incentive, but often these car loan rate incentives are attached to conditions that may not be the best option.  It is always worthwhile to compare car loan rates and terms before entering a show room to know in advance where the best rates and terms are available as well as whether it is a better deal to take the manufacturers lower car loan rate or a cash rebate. 

Things can get pretty exciting at an auto dealership so it may be wise to separate the thrill of buying from the business of borrowing.  Most experts agree that it is better to go shopping for a new car with your financing already lined up from a source other than the dealer.  The dealer may be disappointed, but you’ll keep a cooler head and a clearer focus.  You’ll also be a little bit better off financially as a dealer always gets a commission for setting up your loan, and guess who pays for that:  the interest rate on a car loan you get through a dealer will not be as good as the car loan rate and term you can get on your own. 

When a new car is manufactured and delivered to the retailer, a value is assigned to the vehicle.  This is called the MSRP, Manufacturer’s Suggested Retail Price.  By law, the price is the same nationwide.  With the exception of a few options or colors, the vehicles are essentially identical, and valued at the same amount of money.  The same cannot be said of used cars, so the loan process is different and the consumer pays a higher price.

Banks, and leasing companies, can use the MSRP to establish values for new car loans without having to appraise, determine in the individual value, every new car.  In effect, the new car becomes the collateral or security against the outstanding balance of the car loan.

Used cars are a bit different.  Even though two used cars may appear outwardly identical, their mileage and physical condition may make their values different by thousands of dollars.  Establishing a used car value is not as simple as reading the asking price. 

If you are considering a used car and want to get financing the process is a bit more difficult, especially if the car is five years old or more.  Typically, used car values are a little bit more difficult to determine, interest rates are higher, and down payments get larger as cars get older.  There is a little bit more ambiguity involved and a little bit more risk, and the consumer often pays more for that added risk.  Comparison shopping is a must for used car loan considerations.  Many banks and leasing companies will require larger down payments, or higher interest rates, on their used car loans.  How much higher the interest rate or down payment is going to be is also determined by your personal credit score.

Don’t forget that regardless of the new car loan amount, you have ownership and equity in the vehicle.  Your monthly payments are working to purchase that car and it’s yours to sell or keep as long as you wish.  It’s your car, titled in your name with the car loan reflected as a lien on the car.  The owner or the name on the title has control over the vehicle not the lender or bank.  You can modify the vehicle, add special features or alter it and drive it as you please.

Tags: car loan rates, car loans, used car loan rates, used car loans

This entry was posted on Wednesday, February 11th, 2009 at 4:06 pm and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.