Defining Auto Loans and How They Work
Automobile loans, primarily referred to as auto loans, are part of a branch of lending that is known as a secured loan, which means that an individual is providing collateral to receive cash or equivalent value toward the purchase of an automobile. The interesting thing about a car loan such as this is that the automobile itself acts as the collateral.
People are encouraged to repay their auto loans by way of the threat of losing their vehicle, the same way that, for a mortgage lender, the home itself acts as the collateral, compelling repayment on the very real threat of losing the home. The loan terms are subject to change based on, the preference of the lender, and also negotiation. There are many factors that will decide one’s auto loan rates at the end of the day.
Generally speaking, an auto loan amount will vary depending on myriad factors, such as:
- The down payment one can afford
- The value of the automobile
- The individual’s credit score
- The interest rates associated with the repayment schedule
- And other factors
Let’s go over some very common information associated with automobile payment, loans and financing through loans and answer some of the most common questions potential auto lendees have when seeking financing for their next car.
Answering Common Questions About Auto Loans
How do auto loans work?
Simply speaking, new car loan options are, most often, given by banks or credit unions through dealerships. This is because the automobile itself is the collateral, the thing that theoretically ensures repayment.
So, an individual will go into a car dealership, select the vehicle they would like to own, and ultimately work out something with ownership, which includes the auto loan amount, rate and amount of repayment, etc. This likely requires a credit check to come through, showing that the individual seeking the auto loan has a history of repayment. Though it may also depend on how much money a person can afford as a down payment.
For instance, if the automobile is valued at $60,000, the dealership may require around 10 to 20% of this total put down, which would be $6,000 or $12,000 respectively in this example. With a credit union, they will act as a third-party and perhaps offer financing options depending on membership.
Keep in mind, you still have to submit an application when you’re applying for any auto loan.
What is auto refinancing?
Auto refinance is essentially a new or refreshed version of the initial loan for lower interest rates and-or lower payments, and this does not differ greatly from any other sort of loan refinancing option. This is a way to bring the car payment down. Essentially, a lendee works with a lender to extend the length of their payment structure; the catch, of course, being that the lendee ends up paying back more money in total, although their monthly payments and interest rates are lower.
For example, if a lendee was paying $500 monthly with an interest rate of 3.2%, auto refinancing could drop this payment to $350 monthly with an interest rate of only 2%. However, the end result would be the lendee having to add months or even years to the total repayment schedule, which means, in the long run, they are paying a lot more in total.
What is the amount to be repaid for an auto loan?
Each individual dealership offers different details depending on down payment, the price of the automobile, whether it’s new or used, and other variables. Some will offer trade-in value and loan-to-value options which help to keep payments lower, although generally through long term agreements. Likely is the case that no two auto loan repayment schedules and amounts are exactly the same.
However, speaking about averages across the industry, it is common for an interest rate for both a new and used car, to average about 5% APR. The auto loan amount will always depend on individual factors, such as credit score and debt to income ratio.
Can anyone get an auto loan?
The short answer to this question is yes. The more complicated answer is that not everyone should. For people who have an ample down payment, and a good credit score, they are going to receive more favorable terms in auto loan refinancing, for used and new auto loan options, and likely will not have to use refinancing as an option.
However, for people who do not have stellar credit, and do not have money for a down payment, they run the risk of getting sucked into predatory auto loans, which will have adjustable interest rates that shoot up after a few payments, not to even mention initially higher payments that are much tougher to handle.
Keep in mind that the terms for a new vehicle will be different from a used vehicle, just like people who are pre-qualified will get better terms than people who have poorer credit.
The Bottom Line
At the end of the day, people can find fair, balanced and affordable auto loans easily. It’s also relatively easy to refinance your current loan. The important thing is to know what you’re looking for, and how these places operate. Armed with that knowledge, you can find a pretty fair loan for your circumstances.