Auto loan

Auto loan are among the first commercial loans that most people acquire. A home loan may the largest loan in a person's life, but the automobile loan is the most common. The monthly payments tend to be manageable, the payment term is usually only three to six years, and qualification is relatively easy. Many people with little or no credit experience find that they can establish a good credit score by paying off their car loan diligently.

As with any loan, the borrower must prove to be a good risk to the automobile financer. They may have a low-paying job, poor credit rating, or no credit rating at all. This represents higher risk for the lender, resulting in lower loan amounts, higher interest rates, larger down payments, and sometimes special insurance costs to cover missed payments.

Auto manufacturers, importers and sellers all need to cover their costs plus make a marginal profit from car sales. Auto finance companies make their profits from the compound interest they charge. These companies want to lend money. This is why many private new and used auto dealerships will finance their own sales, even if they lose money on the initial sales price.

While it is common to apply for an auto loan at the point of purchase, applications for auto loans can be completed from home or office through a personal computer. Often in the form of a pre-approved loan, a finance company will tell you how much they will loan to you, at what interest rate and for how long. This is a good way to comparison shop for the best finance deal. You then know what price range you can afford, and your auto salesman may be less inclined to apply pressure on you to over extend yourself.

Many auto sales involve the trade-in of a current automobile with an unpaid balance on its financing. The financing of the new car may include the unpaid balance of the trade-in. This might lead to a situation where you borrow more money than the current car is worth. This is called an upside down loan. Other less than desirable situations include large application fees, prepayment penalties, and transfer fees - all of which may be negotiable.