Understanding Some of the Basics of Car Loans

When a consumer purchases a car with a loan, a bank or other financial institution pays for most or the entire vehicle up-front with the proceeds from the car loan, and the consumer or borrower agrees to pay back the money over time.  The amount of money that is borrowed from the bank is referred to as the principal amount of the loan.  The amount of money the car buyer is contributed up-front is referred to as the down payment for the loan and usually varies from 10% to 20% of the purchase price of the automobile.  Sometimes the car buyer can purchase a new car without a down payment (if they qualify because they have established very good credit); used vehicles generally require a 20% or more down payment but can vary depending upon where the car is purchased and what financial institution is making the car loan..

The payback period or term for a car loan is typically up to five years, although some newer vehicles are being sold with longer-term loans.  The financial institution or bank will charge the borrower interest for the use of their money to buy the car.  Interest rates vary depending on a number of factors such as the individual’s credit rating and the general level of interest rates.  Manufacturers frequently offer lower loan rates as a purchasing incentive, but sometimes these are attached with conditions that may not work or be advantageous for a number of car buyers.  Make sure to ask questions to understand the terms and make yourself comfortable when investigating the various loan options. 

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 most buyers keep a cooler head and a clearer focus when they don’t have to sweat out the financing while negotiating the price of the car.  For most car buyers, they will also be a little bit better off financially as a dealer always generally makes a commission for setting up the car loan.  And guess who pays for that commission, the interest rate the car buyer pays through the loan generated by the dealer.  The higher the rate the dealer can get from the car buyer, the greater the commission they make on the spread between their costs for getting the loan and the interest rate passed on to the car buyer or borrower.  The dealer loan will often not be as good as the one an individual can get on their own.

Tags: car loans

This entry was posted on Tuesday, February 3rd, 2009 at 5:35 am 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.