Financing vehicles through auto loans is one of the most common ways Americans acquire cars, especially new ones and more expensive used ones. If you're interested in acquiring auto loan services, it's wise to learn a bit about how they work. Here are three things you ought to know before you pursue an auto loan.
Secured Credit
There are two main kinds of consumer credit, secured and unsecured. Credit is considered unsecured when you don't have to put up anything to back the lending. For example, most credit card accounts are unsecured because the bank is largely taking a chance on the apparent good faith of the borrower based on what they know about their previous spending and payment habits.
Secured credit involves offering the bank something material. In the case of a vehicle loan, the something is the car itself. The bank will maintain a lien on the car. A lien gives them a claim on the vehicle if you fail to meet the payment schedule. That means they'll be able to repossess the vehicle.
Interest and APR
Interest is essentially the bank's cut for providing auto loan services. This is expressed as a percentage of the amount owed on the vehicle, and it is assessed over and above the price. If you got a loan for a $25,000 car at a rate of 5%, for example, then the interest would be $1,250 and the total paid would be $26,250.
Note that it is rare that simple interest is used on auto loans. Instead, you'll see the APR, the annual percentage rate. This represents the percent of the loan you'll be expected to pay in any given year. If you got a 36-month (three-year) loan using the same numbers from the previous example, you'd end up paying the $1,250 figure for each of the three years. The total would then come out to $28,750, although that can wobble a tiny bit depending on a few oddities of the payment schedule and whether you pay on time, every time.
Down Payment
One of the easiest ways to get a lower interest rate on a loan is to provide a larger down payment. Financial institutions like large down payments because it means they take on less risk. Also, the buyer should be more motivated to pay up because they'll be out the down payment and whatever else they've paid if they default.
Share24 March 2020
Unless you keep all of your money in a piggy bank, you likely make use of money services from time to time. You probably keep your cash in a checking account, and perhaps you also keep some funds in a savings account. You probably also cash checks now and then; maybe you deposit checks or take out loans from time to time. Banks, credit unions, and check cashing businesses all offer various money services to make handling your money easier. If you would like to learn more about these services, then we invite you to read the educational articles on this blog.
