Car loans: what you need to know

Most of the people can’t pay cash for a vehicle upfront, so whether or not they’re making down payments, they’ll likely be using an auto loan to finance their purchases. The price of the car is not the only cost to be paid, because there are additional costs, such as state taxes and registration fees. The dealership may also charge documentation and transportation fees. Without a down payment, these fees get rolled into the amount of the financing.

A car loan, also known as an automobile loan, or auto loan, is a sum of money a consumer borrows in order to purchase a car. When a consumer takes out a car loan from a financial institution, he/she receives the money in a lump sum, then pay it back, plus interest, over time.

The factors that affect the total costs

There are many factors that affect the total costs of a car loan. Let’s see now the 3 major factors that affect both the monthly payment and the total amount to pay on loan:

  • The loan amount. It can be significantly less than the value of the car, depending on whether you have a trade-in vehicle and/or making a down payment.
  • The annual percentage rate. Usually referred to as the APR, this is the effective interest rate you pay on your loan.
  • The loan term. This is the amount of time you have to pay back the loan, typically 36–72 months.

There are, also, other factors that affect the total cost, so it is important to make a research before applying for a car loan.

Types of car loans

There are many types of car loans and it is important to apply for a car loan that is better for your need. Let’s see now the main types of car loan.

  • Standard loan. The moneylender lends the customer the money to buy a new or used vehicle. It is the simplest of loans and can be secured or unsecured (higher interest rate). The vehicle is the security for the loan so the moneylender will demand it be fully insured.
  • Commercial hire purchase. The moneylender buys the car and then hires it to the consumer over a set period. Monthly payments generally pay out the entire loan in the set period and the vehicle is transferred to the consumer when all payments are complete.
  • Finance lease. The moneylender buys the car and then leases it to the consumer. This offers the immediate use of the car with little or no capital outlay. The consumer pays fixed, monthly rental payments and is financially responsible for the maintenance and trade-in residual risk of the car. At the end of the lease period, the consumer is given the option to refinance, return, sell or buy the car for the residual amount.
  • Novated lease. A three-way arrangement where the employee’s wage is reduced in exchange for an equal value of vehicle benefits. The employee leases the car directly from the moneylender. The employer has the obligation to pay the moneylender through a novated deed on the employee’s wage. All operating costs of the car are covered by the employee and he/she has sole responsibility for the car on termination of employment.
  • Operating lease. An agreement where the moneylender buys the vehicle and rents it to the consumer. The moneylender retains ownership of the car. The consumer has no risks associated with ownership, including the residual at the end of the period. At the end of the term, the consumer has the option to buy the car, continue to rent it or change to another car.
  • Chattel mortgage. A fixed loan where the moneylender advances money to buy a vehicle. The moneylender holds a mortgage over the car which is used as security for the loan. The consumer can finance the total purchase price of the car or can make an up-front deposit or can use a trade-in. A residual payment may also be placed at the end of the term.

There are, also, other types of car loans, so it is important to make a research before applying for a car loan.

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