| Most automotive consumers don't have readily | | | | the entire cost of the car. In this case the buyer will |
| available cash for car purchases. They need to | | | | have to have cash to make up the difference as a |
| finance. However, auto financing is not a subject most | | | | down payment. |
| people learn in school and many go into it blind when | | | | Interest rate - Finance companies make money by |
| they make their first car purchase or lease. | | | | charging interest on loans. Interest rates can vary |
| Car loans can come from a variety of sources: the | | | | based on the credit score of the borrower, the finance |
| buyer's family or friends, a local bank or credit union, a | | | | company's policies and rate structure, whether the loan |
| national bank, an online loan company or broker, or | | | | is for a new or used vehicle, and the term (months) of |
| through a dealer. Car dealers typically do not finance | | | | the loan. Individuals with lower credit scores pay a |
| their own loans. They arrange financing on behalf of | | | | higher interest rate. Some banks and finance |
| their customers through a car manufacturer's finance | | | | companies charge higher or lower rates than others. |
| company (GMAC, Ford Motor Credit Corp, etc.) or a | | | | New-car rates are generally lower than used-car |
| large national bank. Some low-end used-car dealers, | | | | rates. Longer loans typically have higher rates than |
| such as buy-here-pay-here dealers, source their own | | | | shorter loans. Dealers' finance companies do not |
| loans. It's important for first-time car buyers to | | | | necessarily have higher interest rates than banks or |
| understand that it is not necessary, and often not wise, | | | | credit unions. In fact, it is common for dealers to offer |
| to get dealer-arranged financing. | | | | limited-time 0% or low-interest promotional rates that |
| First time car buyers may have difficulty getting a loan | | | | can't be matched by local banks or credit unions. |
| if they do not have an established credit history, have | | | | Term - First-time car buyers often opt for very long |
| little or no job history, have limited income, or have | | | | loan terms, up to 84 months (7 years), to get the |
| excessive debt. The solution for most people in this | | | | lowest possible monthly payment. This is generally not |
| situation is to get a family member to co-sign a loan | | | | a good idea for the following reasons. Loan terms of |
| with them. A co-signer is not a co-buyer, but simply a | | | | 60 months or more usually have higher interest rates, |
| responsible party to which the loan company can | | | | compounding the total finance charges paid during the |
| come if the original borrower fails to make payments. | | | | loan. This also contributes to the loan being "upside |
| Having a co-signer is a good solution because it not | | | | down" during almost the entire term, which complicates |
| only gets the loan, but it allows the borrower to build a | | | | matters in the future when the buyer wants to sell or |
| good credit history so that a co-signer will not be | | | | trade before the loan is paid off. It also makes for a |
| necessary the next time he needs a loan. | | | | large financial risk if the vehicle is destroyed in an |
| Car loans have four important components: | | | | accident, or stolen, because insurance only pays the |
| - loan amount | | | | vehicle's market value, not the remaining loan amount. |
| - interest rate | | | | Monthly payment - Car loan payments are calculated |
| - term (months) | | | | using a complex financial formula not easily done by |
| - monthly payment | | | | hand. Use a business calculator or online loan calculator. |
| Loan amount - Loan companies and banks determine | | | | First-time car buyers often underestimate payment |
| how much money they are willing to advance to a | | | | amount due to a lack of understanding of the |
| borrower, based on the value of the car being | | | | calculation. First-timers should avoid "payment buying" - |
| purchased and the ability of the borrower to repay the | | | | negotiating monthly payment with dealers - without |
| loan - based on income and debt. It is possible that the | | | | also understanding the loan amount and interest rate |
| approved loan amount may not be sufficient to pay | | | | that the payment is based on. |