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The Basics of Car Loans

Few people have the luxury of paying cash for a vehicle.

A car loan is one way for you to purchase a new or used vehicle. You borrow money from a lender and pay them back over time, usually with interest. The amount you borrow is called the loan principal or financed balance.

Lenders charge interest, this is how they make a profit. The interest rate is a percentage of the loan that you must pay back in addition to the loan principal. Interest rates are determined by your credit history. The higher the risk of you not paying causes a higher interest rate. Each bank is different on how they determine the risk involved and how the rate is based on that risk.

Most banks consider customers in two categories, Prime and Sub-Prime, some banks even add a category for Super Sub-Prime. This is determined by each consumer’s credit score and payment history. Prime customers have lower interest rates. If the vehicle financed balance is $20,000 on a 60-month term with the loan rate at 5 percent, you’ll have a payment of $377 per month. At a rate of 2.9 percent, you can drop it to $358 per month. Sub-prime consumers have lower credit scores and mostly like some type of delinquencies in the past. Having a high unpaid balance could also lower your score. The same $20,000 loan on a 60-month term with a loan rate at 12 percent, you’ll have a payment of $444 per month. Super sub-prime customers may only qualify for short term financing based on the risk of long term, being reduced to a 36-48 month term. Often customers call the dealership to get payments without the finance manager knowing their credit. The rate and term are all based on the credit score and history, making it almost impossible to have an accurate guess on the payment without the proper information and customer credit history.

The dealer does not own the vehicle or responsible for your payment once you have signed a contract for repayment of the loan with the bank and the loan is complete. The dealer is not paid until you get the bank everything they need to complete the deal. Just because you drove off the lot with the car doesn’t mean that the dealer has been paid. When signing a contract you have an agreement to provide the information the bank requires. Many people think that when you finance a car, the finance company lends you the money and the car is yours. In reality, however, the lender is buying the car and letting you use it.  If you don’t make your car loan payments, the lender can repossess the car. If the car is destroyed or stolen during the term of the loan, you are still responsible for paying the loan back, which is why lenders require you to carry insurance and recommend a service contract and aftermarket products to handle all the mechanic repairs to the vehicle.

Aftermarket products, which are offered by the finance department, are products that are added to the loan and not required with the purchase of the vehicle. Warranty or service contract, gap, credit life, wheel and tire protection, and maintenance options are recommended by the lenders because it lowers the risk of default on the loan. These products can possibly lower the rates of the loan depending on the lenders options. The two most commons aftermarket products are Warranty or Service Contract and GAP Insurance. A Warranty is offered by the manufacturer for factory defects. The Service Contract, is an extension of the warranty but most importantly covers mechanical repair, usually with a deductible, so that the customer does not have to come out of pocket for the full cost of the repair. This is important because it allows the customer to still afford their payment when a repair is needed. Gap Insurance covers the difference between what the unpaid finance balance and what the insurance company offers or says the vehicle is worth in a total loss accident. Credit Life insurance option, pays off the vehicle balance in case of death. Wheel and Tire protection is usually inexpensive and cover the wheels and tires on the vehicle. Maintenance options are pre-paid agreements with the service departments that allow you to get a discount on required maintenance or service most customer do to maintain the performance of their vehicle. Most dealers offer this on oil changes and tire rotations. Depending on your loan, aftermarket products can be added to the finance balance, making it affordable to purchase.There are several other products that are available, and each dealer and lender have options that can protect the consumer. Contact the finance department for more details.
Few people have the luxury of paying cash for a vehicle.For the rest of us, we have to get a line of credit, with the vehicle as the collateral. We will be happy to give you more information about how to finance a vehicle and what your interest rate. Contact us today for more details.

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