auto-loan, car-loan

Before buying any expensive product you must consider everything and make a decision.

The car is definitely an expensive product. You have to spend a huge amount to buy a car.

Most people do not have that much money. So they have to take car loan.

Before taking a car loan, you must know a few things well. How does such a car loan work? Where can I get a car loan? What are the conditions for me to take a loan?

How does car loan work?

A car loan is an agreement between you and the lender through which the lender gives you a loan to buy a car. After the loan agreement you will get a large amount of money for the car loan from the lender.

If you take a loan from a dealer, you will have to go through many processes. You must first apply for credit from the dealer. After your application, they will check your credit score.

If your credit score is good they will accept the application. Then you have to deal with them. There are some things you need to know when making a deal –

  • Down payment
  • Interest Rate
  • Loan term

Then after the loan agreement you will get the car . Getting a car means that the car is in your custody but the ownership of the car will remain with the car dealer. The sooner you pay the installment, the sooner you will own the car. And if you fail to pay the loan installments, you will not get car ownership. The dealer will take back your car.

And if you take a loan from a bank, then you have to apply to the bank. The bank may give preapproval you before you buy a car. You will get a quote and a letter of commitment from the bank which you will take to the dealer.

The bank will not charge you extra fee. If you take a loan from a bank or credit union, you will get some benefits. For example – you can avoid some extra fees and can save some time.

You can use car loan to buy a new or old car. Also can refinance and lease buyout with this loan. Interest rates on new cars are relatively low.

Related Article: Auto Loan Rates for 2021

Impact of down payment

Suppose you want to buy a car. The car costs $30,000. But you have $5,000. Now if you buy the car with this five thousand dollars and you pay the rest in installments then the down payment will be $5000 dollars and the loan principal will be $25000 dollars.

Remember that the more you pay as a down payment, the more profit you will get. Because the interest is calculated on the principal.

This is why dealers want you to pay less down payment, they will get more interest if you pay less down payment. So if you can afford it, do more down payment. Pay at least 20% down for buying a new car and at least 10% for buying an old car.

Another advantage of paying more down payment is that even if you have a low credit score, you can negotiate well with dealers.

How interest rate is determined?

US monthly car loan rate
Photo – Statista

The interest rate is the percentage of the principal amount that is charged by the lender for borrowing money.

For example, you bought a car on credit. The car costs $20,000. But the lender stipulates that you have to pay an additional $1,000 with $20,000. Then this $1,000 will be interest. And the interest rate is 5%.

The interest is the income of the lender. And extra cost for you. Things a lender considers to calculate Interest:  Things a lender considers to calculate car loan Interest

  • Credit history
  • Credit score
  • Loan Term
  • Amount of Down payment
  • Nature of vehicle

Credit history

Dealers check your credit history when calculating interest. If you have a good credit history, you will get low interest loans. And if your credit history is not good or you do not have a credit history, then the amount of interest will be higher. Again, even if you have a bankruptcy record, many lenders will lend you money if you become get rid of from this.

Credit score

what is a good credit score

 

Credit score plays a very important role. The better your credit score, the lower the interest rate for you. Credit score range is usually between 300 and 800. It is calculated based on your credit report, including your payment history, your loan amount, and the length of your credit history.

However, some lenders may verify some more information. If your credit score is between 580 and 669 then it is considered as fair, if it is between 670 and 739 then it is considered as good, if it is 740-799 then it is considered as very good.

The Loan term

During the auto loan agreement you have to analyze the loan term and then make a decision. Because it has huge impact on your payment. You have to make a decision considering short term and long term loan benefits.

Auto loan term is usually between 36 to 72 months. However, as the price of new cars is rising, in some cases the loan term may be longer.

Your monthly payment is determined based on the amount of the loan, the annual interest rate and the loan term.

If the loan term is more, your monthly payment will be less and if the loan term is less, the monthly payment will be more.

However, if the loan term is longer, your monthly payment may decrease, but in the long run, your interest rate will be higher. See the example given by Bank of America –

lower monthly payment impact

Vehicle nature

The interest rate on your car loan will be higher or lower depending on whether you are buying a new or used car. If you buy a new car you will get a low interest loan and if you buy an old car you will have to pay a higher interest.

Again, If you want to buy an old car, you have to fulfill some requirements of the lender. For example, car’s age should not be more than 10 years; mileage should not be more than 125,000 miles, etc.

Terms and Conditions of Auto Loan

Terms and Conditions are a very important part of the agreement. This section covers a number of issues such as insurance, registration, maintenance requirements, etc.

You must take a sincere look at what is in this part. Because dealers may include some terms and conditions for their profit which causes loss to you. As such they may consider this loan as contingent. This means that the term of the loan will change if any event arises in the future.

So if you sign the contract without considering everything, you will suffer huge losses in the future.

Steps to get a Car Loan

You have to go through some steps when you decide to take a car loan.

Make primary decision about car loan

In the first step, you will make the initial decision about taking a loan. You have to determine the price of car. That’s why you have to decide how much loan to take. You need to calculate how much you can afford to pay in monthly installments. You also have to decide whether to take a loan from a dealer or a bank.

Know your Credit Score

A lender will determine the interest rate of your loan based on the credit score. If your credit score is good, you will get a loan at low interest and if it is bad, the interest rate of your loan will be higher. So it is very important for you to know.

Search lender

At this stage you need to find the lender. Select the lender from which you will get a low interest loan. You should do some research to find out perfect lnder for you.

Apply for the loan

After selecting the right lender, you have to apply in accordance with the terms of the lenders. They will verify your credit score after you apply. If all goes well, they will approve the loan.

Buy your car

Once you have the funds, you can buy a car. After purchasing the car, you have to inform lenders about the car’s year, make, model and Vehicle Identification Number (VIN.).

Conclusion

Since car loans are a big burden for you, you need to analyze everything well before making this decision. Let’s take a look at the summary of the whole text.

If you take a loan from a dealer, you will have to go through many processes. You must first apply for credit from the dealer. After your application, they will check your credit score.

There are some things you need to know when making a deal –

  • Down payment
  • Interest Rate
  • Loan term

Remember that the more you pay as a down payment, the more profit you will get. Because the interest is calculated on the principal.

Interest rate is a big factor to determine the loan cost. To calculate interest rate lender considers –

  • Credit history
  • Credit score
  • Loan Term
  • Amount of Down payment
  • Nature of vehicle

The better your credit score, the lower the interest rate for you. If your credit score is between 580 and 669 then it is considered as fair, if it is between 670 and 739 then it is considered as good, if it is above 740 then it is considered as Excellent.

Auto loan term is usually between 36 to 72 months.

Now you can start your journey!

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