Financing
Financing Your Vehicle
Auto financing enables a borrower to receive an amount of money from a lender, bank, or financial institution such as a credit agency which must be paid back, usually but not always in regular installments, to the lender. This service is generally provided at a cost referred to as interest on the borrowed amount. A borrower may be subject to certain restrictions or requirements such as particular types of insurance, maintaining a warranty, and down payments in order to receive the loan.
A loan taken out to purchase a new or used car may be secured by the vehicle, in much of the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the life of the car. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.
Secured
A secured loan is a loan in which the borrower pledges an asset or vehicle as collateral for the loan. In this arrangement, the money is used to purchase the vehicle however the financial institution is given security in the form of a lien on the title to the vehicle until the loan is paid off in full. If the borrower defaults on the loan, the financial institution would have the legal right to repossess the vehicle and sell it to recover sums owed. In some cases, repossession does not necessarily mean that the lender can not seek additional fines and fees for default of contract from the borrower. All loans are different and must be examined closely at signing.
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Unsecured
Unsecured loans are loans that are not secured against the borrowers assets or vehicle. These may be available from financial institutions under many different circumstances and marketing packages but are generally only available to those whom have a near perfect credit history.
Predatory Lending
Predatory lending is a form of abuse which involves granting loans where the lender charges excessive interest. This should be on the mind of every consumer seeking financing for a vehicle - especially if their credit is less than perfect. Interest rates or your APR (Annual Percentage Rate - the cost of a loan, including the interest rate and other fees) vary greatly, from no interest at all to unlimited interest rates or rates near 25%. This can cause the borrower to pay back many times more over time than the original loan amount. Remember, banks are in this to make money and they will charge as high of an interest rate as they can as long as they believe shopping around will yield the borrower no bargains. Be careful to examine your vehicle loan contract, monthly payments, payoff amount limitations, early termination penalties if there are any, and interest rates pertaining to the financing.
Factors That Determine Interest Rates
- Your credit - your credit rating, payment history, and amount of debt you already have.
- Your income - a stable income that’s high enough to pay your debts and other monthly expenses.
- Type of vehicle - interest rates on new cars are usually less than used cars.
- Term of your loan - financing for a longer term lowers your payment, but will cost you more over the life of the loan.
Early Termination Fees
Early termination fees have been around almost as long as vehicle loans. Banks and lending institutions sometimes impose fees on customers who pay off their loans before their contract term has expired. They do this because most of their money is made over time as each installment is paid on the loan. Customers who terminate their loans by paying off the debt early can avoid these fees thus some financial institutions will attempt to regulate this by imposing fees for early termination. Check your loan contract and documentation upon signing to ensure paying of the loan early is an option.
To find out about leasing your vehicle rather than financing it, click here.
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