Basic Information About Auto Loans

When a vehicle is purchased with a loan, the lending company pays for most or the entire vehicle up front and the buyer agrees to pay back the money over time.

The amount of money the buyer borrows is referred to as the principal. The amount paid by the buyer up front is called the down payment and can vary from 0% to 20% of the purchase price of the vehicle. A trade-in is often taken as down payment.

The payback period for an auto loan is typically up to five years, although some newer vehicles are being sold with longer-term loans. The financial institution will charge interest for the use of their money. Interest rates vary depending on a number of factors such as credit rating and where the borrower lives.

A car loan, like any loan depends on five things. Your ability to pay back the car loan, length of employment, time at residence, credit history and the value of the item you are purchasing.

Finance managers at the various car sources are experts in auto loans (selling money) to prospective buyers. By law, the cost of credit is expressed as an annual percentage rate (APR) and the buyer can compare the cost of loans by comparing annual percentage rates. The APR is the standard way of talking about interest rates. The federal Truth In Lending Act requires creditors to clearly disclose all the required cost terms in writing.

The loan contract must include the APR, the amount financed, the finance charge, the total number of payments (it's not a good idea to finance any car for more than four years as they depreciate quickly and you'll soon be upside down -owe more than the car is worth-on your loan) and the payment schedule. Also required is the total sales price, which is the sum of the total scheduled payments and the down payment. The finance charge is the total cost of the loan including interest, fees and credit checks. The credit contract shows the buyer how much more it costs to buy on credit than to pay cash.

When you obtain an automobile loan the car becomes collateral, which means that the creditor will hold the title to the car until the loan is paid in full. So if you fail to make your payments, then legally the creditor can repossess the car and sell it.

Credit - The right granted by a creditor to pay in the future in order to buy or borrow in the present.

Credit-scoring (how credit rating score is obtained) - A method, based on statistical analysis of applicant characteristics, through which lenders determine the applicant's qualification for credit.