Car loan
A home loan may the largest loan in a person's
life, but the automobile loan is the most common. The
monthly payments tend to be manageable, the payment term is
usually only three to six years, and qualification is
relatively easy. Many people with little or no credit
experience find that they can establish a good credit score by
paying off their car loan diligently.
As with any loan, the borrower must prove to be a good risk to
the automobile financer. They may have a low-paying job, poor
credit rating, or no credit rating at all. This represents
higher risk for the lender, resulting in lower loan amounts,
higher interest rates, larger down payments, and sometimes
special insurance costs to cover missed payments.
Auto manufacturers, importers and sellers all need to cover
their costs plus make a marginal profit from car sales. Auto
finance companies make their profits from the compound interest
they charge. These companies want to lend money. This is why
many private new and used auto dealerships will finance their
own sales, even if they lose money on the initial sales
price.
While it is common to apply for an auto loan at the point of
purchase, applications for auto loans can be completed from
home or office through a personal computer. Often in the form
of a pre-approved loan, a finance company will tell you how
much they will loan to you, at what interest rate and for how
long. This is a good way to comparison shop for the best
finance deal. You then know what price range you can afford,
and your auto salesman may be less inclined to apply pressure
on you to over extend yourself.
Many auto sales involve the trade-in of a
current automobile with an unpaid balance on its financing. The
financing of the new car may include the unpaid balance of the
trade-in. This might lead to a situation where you borrow more
money than the current car is worth. This is called an upside
down loan. Other less than desirable situations include large
application fees, prepayment penalties, and transfer fees - all
of which may be negotiable.
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