Tag Archives: auto loan

How Does a Car Loan Work?

There are essentially two ways to buy a car. You can pay cash, or if you don’t have the necessary cash, you can get a loan. Actually there’s another way — leasing — that we won’t discuss here, but is discussed in a number of other articles on this web site.

When you get a loan, you are borrowing money from a bank, credit union, or finance company and promising to repay that money, with interest, over a specified period of time. You use that money to pay the dealer for your car. Although car buyers can arrange their own car loans with local banks or credit unions, many choose to let their car dealer arrange the loan for them.  Dealers don’t provide loans themselves but work with banks or finance companies on customers’ behalf.

So if you buy a brand new Ford, and need a loan, the Ford dealer will send our loan application to Ford Credit Corporation, who will provide the loan (assuming you are approved). Ford Credit pays the dealer for the car and begins sending you bills for each monthly payment. From now on, until the loan has been paid off, you will be dealing with Ford Credit, not the car dealer. It often takes a few days for the approval to come through.

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Auto Loan Rates – How to Get the Best Rates

car loan rateWhen you buy a car with a loan, you not only pay back the amount borrowed but you also pay finance charges (interest).  Each month’s loan payment consists partly of principle and partly of interest. Actually, the amount of principle and interest changes each month, although the total remains the same. In the beginning, you pay more interest and less principle. Near the end of the loan, you are paying nearly all principle.

The amount of finance charges you pay depends on the interest rate and the length (term) of your loan. Interest rates can vary between different lenders. The interest rate you pay also depends on your credit score. Someone with poor credit will pay a higher rate than someone with outstanding credit. More about credit later.

Interest rates are generally higher for used cars than for new cars. And longer loan terms have higher interest rates than shorter loans.

At the time of this writing the national average new-car interest rate is about 3.0% for a 4-year car loan and a bit higher for used car loans. Dealers sometimes add a percentage point or two for additional profit. This is called “reserve.”

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5 Tips for Getting an Auto Loan

tips for getting auto loansFor many people, an auto loan is the most significant and largest financial transaction they make in their lives — at least until they get a home mortgage. Because it is so significant, it makes sense to take the right steps and avoid mistakes in the process.

1. First, shop around for auto loans at your local banks, credit unions, and financial companies. You don’t have to finance through your car dealer. In fact, by shopping around first, you’ll know if your dealer’s loan offer is good or not. When you talk to a bank or credit union, you may also be able to get pre-approved at a guaranteed interest rate and for a given amount. That way, you’ll know what price car you can afford when you go to your dealer. You are not obligated to accept any loan offer you receive, even those for which you are pre-approved.

2. Know your credit score. Your credit can make the difference between getting approved for a car loan or not. If you are approved, your credit score will determine the interest rate you pay and the down payment amount you’ll have to make. Car companies offer special promotional deals each month, such as 0% APR loans and low-payment leases, which require good credit. To get the best rates and best deals you’ll need a credit score of 700 or above. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!
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Car Loan – In Plain Language

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”.

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