Car loan financing is the act of borrowing money from lenders used to purchase a car. Lenders place interest rates on the amount borrowed. This is paid together with the principal amount within a given period. To fully understand car loan financing, read the things below.
1. Two Ways to Get a Car loan Financing
Getting a car loan can be accomplished in two ways. The first method is by going directly to a dealership. There are salespersons in the dealership which act as middlemen between you and the lender. Through this, you are able to apply for a car loan.
The second method is practiced by going to a professional lender. These lenders are the banks and credit unions. All you need to do is to fill in the application form and submit the necessary requirements to get the loan approved. Once the loan is approved, you can bring this to a car dealership and purchase the vehicle you want.
2. Lenders allow Loans with Interest Payments Attached to It
Lenders offer loans to earn profit out of it. This is in the form of interests. The lender gives you the amount you need, the interest rate, and the period of payment.
For example, you obtained a loan of $20,000 with an interest rate of 2% in five years. The total interest within the five year period is $400. On or before the loan term ends, you need to pay the principal amount which is $20,000 and the $400 interest rate. Your total payment then is $20,400.
3. The Interest rate is Based on One’s Credit Score
Lenders use the credit score you own in the assessment of the interest rate. Low credit scores could mean higher interest rates. When the score is too low, this could result to denial of your loan application. A higher credit score on the other hand results to lower interest rate. In cases where the credit score is very high, lenders might allow you to waive the interest rate.
Generally, young people own low credit scores, despite of their low or no debt status and timely bill payments. This is because young people possess credit records that are too short. Lenders have no basis for their loan assessments.
4. Car Loans are Tied with Specified Payment Period
Loans have specific term of payments. The amount borrowed together with the interest rates charged should be fully paid within the loan period. The total amount payable is divided with the number of months covering the loan and the quotient serves as the monthly payment.