Whether it’s a need or a want, if you feel that you’ve got to have a new car, never deny yourself from getting one. If you don’t have enough cash on hand to pay for it, a car loan is worth considering.
Searching for car loans can be overwhelming especially when it’s your first time. It’s best to get a good grip on the basics. Understanding how a car loan works are the key to getting a good deal.
So, what is a car loan?
A car loan is pretty much what it is – a borrowed money to pay for a car. It is basically a personal loan in which the proceeds are used to purchase an automobile. More specifically, a lender lets you borrow the cash it takes to buy a vehicle.
You pay back the lender the amount of the loan with interest. Repayments for car loans are usually on a monthly basis until the whole amount borrowed is fully paid.
Oftentimes, a personal loan is an unsecured loan, which means it is granted based on the borrower’s creditworthiness. It is not secured by any of the borrower’s personal assets.
Car loans, on the other hand, are always secured loans, and the collateral is the vehicle itself. This means that if you cannot make the repayments, the lender will seize your purchased vehicle and will be sold to pay off the loan debt.
That’s pretty straight and simple.
Essentials of a Car Loan
Cost of the Loan
The cost of a car loan includes the principal, which is the original amount you borrow, and the interest. The amount of the principal is equivalent to the negotiated cost of the vehicle itself. The interest is the total amount of the costs accrued over the loan term based on the principal amount and the interest rate.
An interest rate is what the lender charges you for the money borrowed.
The down payment is the upfront amount of money that you pay at the time of the purchase of the car. It is usually a percentage of the total price of the vehicle bought. It is not a legal requirement when taking out a car loan, but is most lenders require it.
Terms and Conditions
This refers to all of the other details of the car loan. It includes the loan term that is usually expressed in months, insurance and registration requirements, loan payoff and resale terms, maintenance requirements, conditions regarding theft or accident, and conditions of loan default and repossession.
It is important that you go through the terms and conditions carefully and have a clear understanding of what they mean before signing the agreement.
How to Go About It
Make a realistic budget.
It is crucial that you work out a realistic budget that shows you what you can afford for your monthly repayment. Decide how long your loan term is. Then, determine the amount you want to make a down payment. This will tell you how many cars you can afford to purchase.
Check your credit rating.
You have to know exactly how you score in your credit history before making a move with any lender. It is what lenders look for in the first place. Credit reports and scores are the basis of the lenders in determining the loan interest rates and terms. If you have a high credit score, then you are lucky and you’ll get a lower rate.
Compare loan rate and terms.
Rates and terms vary from lender to lender, so it’s important to look for the best loan deal before heading out to shop for a car.
Getting guaranteed for a loan means the pre-approved loan is within your budget. It means that you’ve set your limits before stepping into a dealer’s showroom where your emotions might get the best of you and your wallet. A pre-approved loan is best found in banks and credit unions.
Fetch your new car.
After everything is settled, go to the auto dealer and get the exact car you want. Provide the year, make, model, and other important details to your lender. Car insurance is also very important, so make sure to get one as soon as possible. Otherwise, you can’t drive off your new car as most dealers require you to have car insurance.
Increase your chances of getting a car loan approved.
Get a Guarantor
If your credit scores too low or if you don’t have yet established a credit history, it might be challenging for you to qualify for a car loan. A guarantor or co-signer can help you get the car you’ve been dreaming to have.
The guarantor will help you by guaranteeing the loan. If you do not pay your loan, his or her credit will be affected the same way as if the loan were his or her own. You can ask your close friend or close relative such as a parent to be your guarantor. On the bright side, this is a good way for you to establish credit and build a good credit rating.
P2P Auto Loan
If you can’t find a guarantor, you can rely on peer-to-peer lending or P2P. You’ll find many of these peer-to-peer auto loan websites available to help match lenders and borrowers. They will check your credit score. If you have a low or non-existent score, you will be marked “high risk”. The higher the risk of the loan, the higher the interest rate. P2P is another lending option if you have a poor or non-existent credit rating.
It’s not difficult to find a car loan lender as they are abundant. What’s important is for you to check on the reputation of your lender. Don’t miss out the fine print of the loan agreement, make sure to read it before signing anything. Don’t forget to do the math, too. Go through the numbers, and make sure they add up and match those that you and the lender agreed to.