Many consumers need car financing to buy a new or used vehicle. Some buyers use direct lending, meaning they request a loan from a financial institution they have a banking relationship with. Consumers can also take advantage of a dealer financing; dealerships set up loans directly with financial institutions. When obtaining a car loan from either of these sources, a consumer agrees to repay the loan amount plus a finance charge over a period of time.
Vehicle Loan Basics
When determining the loan amount for a used vehicle, lenders go by a used car value as set by the National Automobile Dealers Association or Kelley Blue Book. Dealers set the new-car prices themselves. Some financial institutions finance the full amount of the vehicle cost, including taxes and fees (such as car plates). In most cases, consumers need to pay these charges out of pocket. The loan amount and the interest rate often depend on the applicant's creditworthiness. Buyers also have an option of including an extended warranty and credit insurance into the loan amount. They may choose to pay these charges up front.
Finance Charge
A finance charge is a cost of having a loan. It is based on the term of the loan and the interest rate, which is often referred to as annual percentage rate, or APR. Buyers often choose a longer term of the loan because it gives them a lower monthly payment. However, the longer the term of the loan, the higher the total finance charge paid to the bank. If a consumer includes other options with the loan, such as service contract (extended warranty) or credit insurance, he is paying more in finance charges. Finance charges may include other fees, such as late fees or loan pre-payment penalties. A loan contract states how the lender calculates finance charges and describes the fees the buyer may have to pay.
Front-loaded Interest Loan
Some financial institutions "front-load" vehicle loans. This means that finance charge is calculated for the term of the loan and added to it. Consumers' payments are applied toward the finance charge first, before the principal. This a disadvantage if a consumer pays off the loan early because he has already paid the interest for the full term of the loan. Banks may charge additional pre-payment penalties if a consumer pays off the balance before the loan term ends.
Simple Interest Loan
Simple-interest loans, also known as straight amortization loans, calculate the finance charge based on the average daily balance. A lender can provide a printout of an amortization schedule which will list how the payments will be applied. Loan statements usually break down loan payments into a principal and finance charge. Finance charges may include other fees, such as late payment charges.
0 comments:
Post a Comment