Auto Loans

Auto loans refer to loans you obtain to purchase a car. Getting a used auto loan is not always easy as the lender wants to be sure that the amount of the loan will be covererd by the value of the car if you later default - ie, cannot afford to make the loan payments.

Lenders usually require the car to be covered by insurance, as this protects the security (the car) in in the event of an accident. Lenders will also give important consideration to your credit standing as reflected in your credit report. Those with a bad credit standing will usually incur higher interest rates on their loans as compared to those with good credit standing.

When you buy a used car, the cost of the car is less than for a new one so the amount you will borrow will also be less, as will your repayments. If you pay your auto loan repayments on time, you will build a good credit rating, which will let you borrow more at a lower interest rate next time. Lenders do not really care if you purchase a brand new or used car or have borrowed the finance. As long as you make the necessary monthly payments on time then you are of good credit standing in their eyes.

Having an auto loan is actually a useful way to establish a good credit reputation.

As used auto loans are usually for a lower amount than those for new cars, this could be helpful in making your loan payments on time. You can build your credit rating through an auto loan. A good credit standing will qualify you to buy more expensive items later, such as a new car or a house.

With the good credit rating you have established in your auto loan, you will also be able to obtain lower interest rates should you apply for a loan again. This is because a good credit standing will qualify you for the normal or lower interest rates usually between 2% to 15%. For those with bad credit standing, these rates could go up to as much as 30%.

To have your auto loan approved, you need to get a credit report check done and also meet requirements for the vehicle, like mileage, good appearance and road worthiness. These factors will enable the lender to determine what the vehicle is worth.

Lending institutions usually require that you furnish the following documents before applying:

Proof of income which can be verified
Proof of residence which can be verified
Has good credit history
Valid driver’s license
Valid title to the automobile in cases of trade-in
Personal references
STIPS or additional items such as tax returns, phone bills, bank statements and others

For first-time car buyers, there are lenders who allow first-time auto loans applicants. Interest rates for auto loans usually depend on your credit history, whether it is a new or used car and the length of the auto loans. The length of time for auto loans is usually within 36, 48, 60 or 72 months. For shorter auto loans, the interest rates are cheaper. But they do require larger monthly payments than the long-term loans.

Auto loans can also be classified as simple interest loans. For a simple interest auto loan, interest is computed based on the original principal, not on the interest accrued. Simple interest loans are often applicable in cases where the loan terms are higher than $25,000 and the term is more than 60 months.

Auto loans can also be either direct financing or indirect financing. Direct financing happens when you obtain auto loans directly from the bank or any other lending institution. Indirect financing is obtained from the dealership. Often the dealership has a mark-up on the interest rate.

In some auto loans, prepayment fees apply and these refer to the charges of the lender for paying off your loan balance early. Not all lenders and dealerships will charge them and they are not commonly found in auto loans. The full amount of the auto loans are generally applied to the vehicle itself. Also, auto lenders usually will not give more than the value of the car, nor will they allow auto loans to be used for other purposes.

To determine the value of interest rates for the auto loan, there are several factors to be considered: credit history, down payment made, credit risk and general banking factors such as the amount of interest the bank is charged for its borrowings. Generally, the application process takes only a few minutes, but it can be as long as a few hours if there is incomplete information or there are additional requirements.

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