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Posted by Loans on Oct 21, 2010 7:38:23 AM

Auto Loan Financing Basics

Thousands of first-time car buyers enter the market every day.   Unfortunately, many such buyers are not familiar with the basics of auto   loan financing and often make costly mistakes.

New car buyers should educate themselves about auto financing long   before they step into a dealer showroom. Learning about financing from a   dealer salesperson on the day you intend to buy a car is not the best   way.

The factors that determine how much you’ll pay for an auto loan are   1)amount to be financed, 2)loan term (months), and 3) interest rate  (finance charges).

The amount to be financed will include the vehicle price that you and   the dealer agree upon, plus any additional costs such as credit   insurance, extended warranty, and dealer-installed optional equipment.   This amount may also include fees and taxes involved in the purchase.   This amount can be reduced by any down payment, rebates, or trade-in   allowance.

Loan term is the number of payment months, and can range from 24   months to 72 months or more. Generally, the longer the loan, the lower   the payments. However, there are disadvantages to long-term loans. Long   loans with lower payments do not pay down the loan principal as quickly   as a shorter loan. This often creates a “negative equity” situation in   which the loan balance exceeds the current market value of the  vehicle.  This can become a problem if the owner wants to sell or trade  for  another vehicle in the middle of the loan. Furthermore, if the  vehicle  is stolen or totaled in an accident in mid-loan, insurance only  pays  current market value, not outstanding loan balance.

Interest rate determines what you’ll pay in finance charges for your   loan. At the time of this writing, the national average interest rate   for a 36-month new-car loan is 6.28% (from BankRate.com). Used car rates   are higher. Rates can vary from lender to lender, and dealer to  dealer.  Dealers often mark up a lenders rate, so it pays to shop around  for  your own financing rate from banks and credit unions. Your  interest rate  is also dependent on your credit score. A poor score can  result in a  high rate.

Car manufacturers frequently offer low promotional interest rates,   even as low as 0%, which are usally very good deals. However, make sure   you understand all the details and conditions that go along with the   deal before you accept.

One of the best ways to explore how the above factors affect the   payment amount of an auto loan is by using a full-function online   calculator such as the Auto Loan Calculator.

 

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