car loan explainedYou, the car buyer, wish to purchase a car but you don’t have the necessary cash.

You need a car loan.

A bank or credit union can provide you the loan you need, or your car dealer can arrange the loan for you with a bank or finance company that he works with. Understand that dealers generally don’t make loans nor approve them.

The bank or finance company explains the loan to you in this way:

“We are willing to loan you our money to pay the dealer for your new car, assuming we check your credit history and find that there is not a risk that you won’t pay us back our money. If you have no credit history or your credit is poor, we may decide to turn you down. We might also turn you down if you do not have a steady source of income that will allow you to repay the loan. If you can get a co-signer with good credit and a good income who is willing to sign with you, we may reconsider”.

“When we pay the dealer for your car, using the money you borrowed from us, we will set up a repayment plan that will allow you to pay us back over a specific number of months. We will include a finance charge (interest) with each monthly payment that compensates us for your use of our money. The interest rate will depend on the going national rate for such loans. It also depends on your credit score* because the lower your score, the higher the risk to us that you might not repay all your loan, and we must charge a higher interest rate to compensate for that additional risk. Also know that if a dealer arranges your loan for you, he may add one or two percentage points to the interest rate for his service to you. Understand that the total cost of your loan wiil be the cost of your vehicle, plus any sales tax your may have to pay, plus our finance costs”.

“If you are buying a brand new car, we may ask you to make a cash down payment, which reduces the amount of the loan you will need — which reduces the risk to us that we might not be able to recover the full loan balance if we have to repossess your car and sell it at auction. If we can’t recover the full balance even after selling the car, we will hold you responsible any remaining balance. We will also make a negative report to the major credit agencies about you. That information will remain in your credit history for a period of seven years, possibly preventing you from getting other loans during that time”.

“If you are buying a used car, we will only loan you an amount not to exceed the “book” value of the car. If you are paying more than book value, you will have to make a cash down payment equal to the difference. Also know that the interest rate for used-car loans is a bit higher than new-car loans and that we might not be able to allow you as many months to repay as with a new-car loan. If your car is too old with too many miles, we may not be able to give you a loan at all”.

“While you are repaying us for your loan, we will hold the title to your car until the loan is completely paid off. We will then give you the title and indicate on it that your loan (lien) has been satisfied and that the car now belongs to you”.

“Should you decide to sell or trade your car before you have completely paid off your loan to us, you will have to pay off the balance of your loan in order to get the title to give to a new buyer. If you are trading your car at a dealer, the dealer will pay off the loan for you. If the value of your trade-in vehicle is more than the loan payoff, the dealer will credit you with the difference, which reduces the cost of your new car. However, if the value of your trade-in is less than your loan payoff, the dealer will add the difference to the cost of your new vehicle, making it more expensive. If this difference is large enough, we may not be able to loan you the full amount of the cost of the new vehicle with the old loan balance added in. In this case, you would have to make a cash down payment that makes up the difference”.

* Automotive consumers should always know their current credit score before shopping for a car. It can make a significant difference in monthly loan payment amount. What’s your FICO score? Find out now when you check your credit report for $1 at!


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