So, you want to buy a car? If you are like most people, you do not have tens of thousands of dollars just sitting around waiting to be spent. That means you need to obtain a car loan. But, how do car loans work? Knowing the answer to this question can make your experience obtaining a loan quick and easy and get you into your newer car much faster!
As with other types of loans, there is more than one way to obtain a car loan. Car dealerships have several resources at their disposal, including financing arms, and third party lenders specializing in auto loans. Or, you can utilize your own resources, such as a credit union or bank. However, to avoid hidden fees and high interest rates, it is important to research and learn how auto loans actually work.
High Risk and Low Risk Loans
One of the most fundamental issues to understand in obtaining an auto loan is that the loaning institution makes its money from the interest you pay on the money you borrow. Some lenders charge high interest rates, but offer shorter loans or higher risk loans. Others charge lower interests rates, but only approve low risk loans or longer term loans. While auto loans may be repaid between two and eight years, the standard repayment period is five years (60 months).
Factors Affecting Car Loans
Several factors affect your ability to obtain a car loan. Many times these factors will affect not only whether you can receive a loan, but how high your interest rate will be. One of the most relied upon factors in determining your eligibility for a car loan is your credit history and ranking. If you have a perfect or close to perfect credit score, you may even be able to receive a loan for 0% interest! Therefore, it is extremely important to know your credit rating before you begin shopping for a car loan.
Another factor considered when shopping for a car loan is your ability to repay the loan. One of the factors in determining this ability is the length of the loan. Typically, people who opt for a shorter loan period will receive better interest rates. This is based on the idea that you are more likely to repay the loan if it doesnt drag on for years raising the uncontrollable risks such as death or loss of job.
Vehicle Down Payment
Finally, the amount of your down payment may help you obtain a lower interest rate. The higher the down payment, the less risk the lender takes on, which benefits you. Typically a higher down payment also entails a shorter loan duration, which lenders prefer. To sum up how a car loan works, the interest you pay is directly related to the lenders profit. A lender looks more favourably on those creating a low risk. Therefore, if you have a great credit history, choose a shorter loan term, and put down a larger down payment, you will likely receive a low to no interest rate for your loan.