An important part of buying a new or used car is auto financing.
Some people pay for their cars all in cash. But most people drive away
in their new purchase by paying only a partial amount to the dealer,
also known as a down payment. This is the amount in cash that you are
willing to pay on the spot to the dealer. What you cannot pay for at the
time of the sale is covered by a loan. Lenders like banks arrange loans
to provide the rest of the money for your car and make arrangements
with you to pay the cash back.
The Impact of Credit Score
The amount and repayment terms of your loan are mostly dependent on your credit score. Basically, a credit score tells the lender how likely you are to pay off the loan. Good credit scores are reflected in high numbers, starting at 650 and up, and allow for larger loans. Lower credit scores usually result in smaller loans.
How Interest Rates Work
Of course, lenders will not just simply let you borrow the amount of money you need. All loans come with an interest rate, which is the additional amount over the original loan that the lender charges you for borrowing the money. The interest rate is a certain percentage of the entire loan amount. It is paid on a monthly basis and calculated as an Annual Percentage Rate or APR. The actual APR will depend on your credit score. High scores can mean interest rates as low as 2 to 5 percent. If your credit is less than perfect, expect to have an APR starting at 15 to 17 percent.
How Long to Finance
It is important to consider is the term of the loan, or the number of months it will take you to pay back the money. Typically, loan periods range from 36 to 60 months. More months result in smaller monthly payments but, over the loan's lifetime, will result in higher interest payments. For shorter terms, you repay more each month but will save on the total APR paid. Your monthly income will determine how large a repayment you can afford to make.
How a Lien Works
While you possess the car, the lender is the one who actually owns the car until the loan is fully repaid. This is called a lien and is the security for the loan. Once paid off, the lender will issue you the certificate of ownership. However, if you miss or stop making payments, the lender can legally take the car back. Besides losing the car itself, you will also lose all the money you have paid for the car up to that point.
Options for People with Credit Problems
If your credit is so bad that banks won't lend to you or will do so only with outrageous repayment terms, your other options are credit unions (if you are a member) or private financing companies. Many automakers have their own in-house financing departments; a possible drawback to this type of loan is that you can buy your car only from the dealers who are part of that financing network. If possible, avoid financing through the dealer, as it makes a commission off every loan arranged, which is added to the APR and increases the total cost of your car.
Possible Vehicle Restrictions
Lenders may also limit the amount of the loan and the condition of the car. Sometimes loans are available only for cars of a certain model year and total mileage. These conditions help reduce the amount of risk taken by the lender on the loan. Before buying your next car, make sure you know the financing options that are available to you so you can decide which one best suits your budget.
The Impact of Credit Score
The amount and repayment terms of your loan are mostly dependent on your credit score. Basically, a credit score tells the lender how likely you are to pay off the loan. Good credit scores are reflected in high numbers, starting at 650 and up, and allow for larger loans. Lower credit scores usually result in smaller loans.
How Interest Rates Work
Of course, lenders will not just simply let you borrow the amount of money you need. All loans come with an interest rate, which is the additional amount over the original loan that the lender charges you for borrowing the money. The interest rate is a certain percentage of the entire loan amount. It is paid on a monthly basis and calculated as an Annual Percentage Rate or APR. The actual APR will depend on your credit score. High scores can mean interest rates as low as 2 to 5 percent. If your credit is less than perfect, expect to have an APR starting at 15 to 17 percent.
How Long to Finance
It is important to consider is the term of the loan, or the number of months it will take you to pay back the money. Typically, loan periods range from 36 to 60 months. More months result in smaller monthly payments but, over the loan's lifetime, will result in higher interest payments. For shorter terms, you repay more each month but will save on the total APR paid. Your monthly income will determine how large a repayment you can afford to make.
How a Lien Works
While you possess the car, the lender is the one who actually owns the car until the loan is fully repaid. This is called a lien and is the security for the loan. Once paid off, the lender will issue you the certificate of ownership. However, if you miss or stop making payments, the lender can legally take the car back. Besides losing the car itself, you will also lose all the money you have paid for the car up to that point.
Options for People with Credit Problems
If your credit is so bad that banks won't lend to you or will do so only with outrageous repayment terms, your other options are credit unions (if you are a member) or private financing companies. Many automakers have their own in-house financing departments; a possible drawback to this type of loan is that you can buy your car only from the dealers who are part of that financing network. If possible, avoid financing through the dealer, as it makes a commission off every loan arranged, which is added to the APR and increases the total cost of your car.
Possible Vehicle Restrictions
Lenders may also limit the amount of the loan and the condition of the car. Sometimes loans are available only for cars of a certain model year and total mileage. These conditions help reduce the amount of risk taken by the lender on the loan. Before buying your next car, make sure you know the financing options that are available to you so you can decide which one best suits your budget.
T. Brown is a prolific financial writers whose work has appeared
on many leading blogs as a contributor or guest writer. When securing
financing, residents of the northeast may find it helpful to work with a
trusted a finance consultancy, such as these serving Pennsylvania and New York respectively.
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