These loans are used by borrowers to finance themselves for the purchase of a new or used car. Auto loans are often provided by the lender. In this case, the lender might even be an auto dealer. Typically, the loan is repaid through in monthly payments. The term of a loan and its interest rate are judged on the basis of your income, credit history or credit score.
Types of Auto Loans
There are secured and unsecured loans. In a secured auto loan the lender would require a collateral to secure payments. Or, they have the ability to simply seize the car if a borrower fails to make payments. On the other hand, an unsecured auto loan will only be approved if the borrower has a high credit score, stable income and willingness to pay a high interest rate. There are four types of auto loans;
Traditional LoansYou can apply for an auto loan at a local bank or credit union. The loan can be secured or unsecured. Either of the loans will be paid over an agreed term period of the loan. The secured loan has lower interest and flexible terms. The borrower may adjust the repayments and the time he pays them.
Dealer Purchase Auto loanApart from the traditional sources of loans like bankers or credit unions, you can also receive an auto loan from a dealership. A dealership owner could have an arrangement with lenders to finance auto loans. You may have spotted a dealership advertising their zero to low interest rates. A drawback to auto loans is the fact that these appealing interest rate options are available for people with ideal credit scores. The dealership could help you get an auto loan with a poor credit score. However, you wouldn’t be able to compare that offer to others because the dealership will not provide you with a loan again.
Lease Buyout Auto LoanUltimately, the borrower is given the option to purchase a leased car at the end of the period. The financial institutions will loan you the money needed to finance the purchase. Purchasing the car at the end of the lease period would be preferable since you have become more accustomed to the car. Alternatively, when you are returning the car, there would be extra charges such as excessive wear and tear or additional use of mileage.
Private Party Purchase Auto LoanLastly, you can apply for a loan to purchase a used car from an individual seller. This option does carry several complex aspects. The lender will not permit the loan if the seller is in debt. In this case, the seller would either have to clear off the debt. Alternatively, let’s consider the seller intends to use the loan payments for paying his debt. The lender will insist on making the loan payment equal to the seller’s payments.
Novated LeaseIn this type of lease, the borrower agrees to take an agreed cut on their wages. In exchange, they would be able to lease the car from the lender. Failure to make repayments would result to termination at work. The additional costs for taking care of the car fall on the borrower. The car can be purchased at the end of a lease.
Chattel MortgageThe lender has a mortgage on the car for securing the loan. They allow the borrower to purchase the car after making a deposit or trading in. The remaining amount is paid in installments for the agreed term period.
How to Apply
Create a budget to evaluate the payments you can afford. Then, search and compare the available offers in the market. Consider your credit score to be aware of the expected interest rates and offers. This could help you understand where and what you could do to attain an auto loan. Go through your assets and credit accounts to estimate the amount you can place for a down payment. A large down payment could reduce the interest rate.
Before taking out an auto loan you should consider the following three factors.
The current interest rate in the market is always changing. You can visit websites that monitor the rates. Visit some dealerships to get the scope of the market rates. You will be able to receive a good deal after careful evaluation.
There are auto loans with a simple interest rate. This means you’d have to repay the original loan amount along with a percentage of the amount borrowed. Unlike compound interest, your payments will not change.
In this case, your auto loans are amortized, where the interest rates can’t change. The payments are made on a proper schedule. Each payment includes a portion of the principal and interest amount.
Car Title Loan
A car title loan is different from an auto loan. These loans aren’t used to finance the purchase of a new car. A car title loan allows the borrower to place their car as collateral to take out a loan. The borrower’s inability to repay the loan would transfer ownership of the car to the lender.
Poor Credit Score Auto Loans
Borrowers with a poor credit score and an adequate income would be less likely to receive an auto loan. For such instances, they can apply for a subprime auto loan. These loans do carry a relatively high interest rate, up to 20%. A borrower could be charged with a penalty for making payments ahead of the schedule. Normally, the borrower with a poor credit score would prefer this despite the drawbacks. This is mainly because a borrower doesn’t have any other option.
Lastly, you shouldn’t give up hope on finding the preferable loan deal. Additionally, do not be discouraged on finding a deal with lower interest rates. A co-signer could be helpful for receiving approval.