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Auto Loans: Getting Them and Paying Them Off

by Kathleen Seligman

Many Americans view their car as one of their most prized possessions. Your car is likely not only your source of transportation; it also represents your freedom and personality. Unfortunately, even when you take care of your car and keep it regularly maintained, you cannot escape the fact that no car lasts forever. Sooner or later, either through accident or wear, every car will break down.

According to www.insurance.com, the most common repairs that cars require involve their brake systems, steering/suspension, carburetors, electrical, and/or transmissions. Some of these may be simple, or at least relatively inexpensive, to fix. All too often, however, especially for older model cars, you’ll find that it becomes more cost effective to buy a new car rather than continue sinking money into the one you have.

But if you’re like most people, you don’t have thousands of dollars sitting in your bank account waiting to be used to buy a car. You are, though, perfectly eligible to take out an auto loan.

What Is An Auto Loan?

An auto loan is a loan taken out for the specific use of buying a new or used car. It is also the most popular loan that people apply for. While you can use personal loans for the purchase of a car, auto loans are designed specifically for this purpose and can include certain amenities that are focused on a new car owner’s needs, such as coverage for emergency breakdowns, reduced-priced car insurance, or other automobile-related discounts.

Like most personal loans, a car loan is unsecured and is therefore not backed by any collateral such as a house or property. Since auto loans are the riskiest type of loans for a lending agency to approve – due to its unsecured nature and the fact that the new car’s value decreases rapidly after purchase – auto loans normally come with a relatively high interest rate. Meanwhile, unlike other kinds of personal loans that cap off close to $10,000, you can take out an auto loan for as much as $25,000 or even more.

How Do You Apply For An Auto Loan?

Just like you would for most other loan types, you can apply for an auto loan at any bank, lending agency, or over the Internet. To apply for an auto loan from a bank’s website, you’ll need to answer questions about your personal financial status, where you plan to buy your car, the model of car you’re considering, as well as the amount you want to borrow, the loan’s term, and whether you are purchasing your car from a dealership or private individual. If you are using a site such as www.lendingtree.com, several loan agencies will contact you with different auto loan options so you can choose the best loan for you.

As with any other kind of loan, you will also be asked whether or not you have a co-signer for your application. A co-signer takes on the same legal responsibility as the original borrower and agrees to pay off the full loan amount if that initial individual cannot. The presence of a co-signer greatly increases the likelihood of not only having your auto loan application accepted, but also of earning a lower interest rate.

Unique to auto loans, you can also go directly to the source and apply for an auto loan through the car manufacturer or dealership that you intend to buy your new or used car from. But be warned: Though it may be easier to apply for an auto loan through a car dealership, the convenience will likely cost you in the form of a higher interest rate. Because of such higher rates, however, auto loans from car dealerships or manufacturers can be ideal for people with a less than perfect credit history since your chances of acceptance are much higher.

Whether you apply for an auto loan through a bank or car dealership determines the type of auto loan you get. Both of these categories of auto loans come with their own terms and conditions.

With an auto loan taken through a car dealership, you can normally use your old car as a trade-in in order to reduce the amount you need to borrow. Regardless of the amount you take out, though, with a car dealership auto loan, you do not officially own your car until the loan is paid off. Should you default on the loan payments, your car will be automatically repossessed.

With an auto loan from a bank or other lending agency, ownership of your new or used car is immediately transferred to you.

There is also an advantage to taking out an auto loan before you even walk into the dealership. If you have already been approved for an auto loan, you can approach a car dealership as a cash buyer. Such a status elevates you in the eyes of the dealership, and you will stand a good chance of ending up with a better deal on your new or used car.

When applying for an auto loan, it’s important to consider details such as whether you’ll be charged a fixed or variable interest rate. If your auto loan has a fixed rate, your rate of interest will stay the same throughout the life of your loan. A variable interest rate will fluctuate as the general annual percentage rate increases or decreases. Though it is possible for interest rates to dip below fixed percentages, it is normally wiser to opt for set rates if you can in order to save the most money over your auto loan’s long-term.

You should also find out if there is a penalty for paying off your auto loan before the agreed upon term is ended. As with any loan, the sooner you can pay it off, the more money you save, but some lending agencies include early repayment penalties in their auto loans that charge you extra for paying off your loan before the term expires.

Once you apply and are approved for your auto loan, you’ll receive a lump sum you can use to purchase your next new or used car.

How Do You Repay An Auto Loan?

Paying off an auto loan is a lot like repaying a personal loan. After you receive the agreed-upon amount, you will begin to pay the money back in regular monthly installments.

While many loan types can be borrowed for as long as 20 or 30 years, the life of an auto loan is normally considerably shorter. An average auto loan can last between three and five years with interest rates ranging from a low of 5% to a high of 15% depending upon the lending agency, loan life, and your personal credit rating.

There are also a couple tricks you can use in order to minimize the total amount of money you need to take out for your auto loan, and thus the amount you’ll need to repay. For instance, using your old car as a trade-in or making a larger original down payment will reduce the cost of your new car along with the amount of money you need to borrow.

If there is no early repayment penalties included in your auto loan, it is also a good idea to try to pay off the loan before the term ends by paying more than you need to each month. If you decide to take this route, make sure you inform your lending agency that you want your extra payments to be applied to your auto loan’s principal rather than its interest. This is an exceptionally good investment if at all possible since even a few extra dollars added to your monthly payments can end up saving you thousands in interest.

You will probably own several cars throughout your lifetime, and with the price of cars rising every year, it’s unlikely you’ll be able to pay for them on your own. But there is an easy solution. Applying for an auto loan is a simple process that will enable you to experience the joy of car ownership.

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