Important information one should know before obtaining finance for purchasing a car?

Most car buyers use all their efforts to find out the most suitable car that can satisfy their aspirations and requirements. Finding a good car finance is also a crucial matter when one plans to buy a car.   Understanding your budget and the amount you can arrange as car loan will help one to make his search for the car in the correct direction. Getting a bad finance can lead to financial mess and spoil your credit history. Often it is a habit of car buyers not to think about good car finance options until they step into the car dealer’s office.   When one ends up with dealer for finance options, most often it happens that dealers are not interested to give you any offers.  In this article I am going to furnish everything one needs to know about car finance before one proceeds to car dealerships for purchasing cars.

Car loan explained

What is car loan:  Car loan is an agreement between the financier and the buyer of the car. As per the agreement financer agrees to give a loan for purchasing a car for the buyer under the condition that the loan will be repaid in equal monthly installments as agreed upon mutually and the company will be charging a fixed percentage of the loan amount as interest.

Interest: Interest is the amount the lender gets for his money which is given as loan to the borrower.   It is usually expressed as interest rate per annum. For the last many years auto loan interest has been very low and now it has started coming up. The amount of the loan, the period of repayment, the type of vehicle, your credit score etc can considerably affect the rate of interest of car loans.   Longer loans are not supported by most lenders as risk factor increases as the period of loan extends. 60 months period of repayment is the most common period for car loans.

Loan repayment details

Principal: Balance of the loan amount to be repaid is considered as the principal. When a loan is initially given principal will be the total loan amount.  As the payment proceeds the amount under principal will start decreasing. One portion of the installment paid will go to towards interest and the balance only will go towards the principal.

Down payment: Down payment is the amount the buyer of a car pays initially from his savings for buying the car.  The price of the car minus the initial payment the buyer is paying will give the amount which the financier has to give as car loan for buying the car. For example if a car is priced $40,000 and the buyer has paid $10,000 initially the car finance needed will be $30,000 only.

Monthly payment: Every buyer of a car with car finance will have to pay back the loan amount in equal monthly installment.  Every monthly installment will include two amounts. The first amount will be the interest till that date and the second amount will be the monthly installment towards the loan repayment. Finding the monthly loan repayment is a difficult process that includes some mathematical calculations. But each bank will be having their car payment calculator with which one can easily find out the emi by just putting some figures like loan amount, type of loan, period of repayment etc. into it.

Importance of credit score

Credit scores represent the person’s credit details and acts as an easy tool to understand the credit worthiness of a person.  These scores are based on credit information received from credit bureaus. These reports are used by money lending institutions to understand the potential risk factors involved while lending loan to its customers.

Why your credit-score matters?

There are many credit-reporting companies and each of them has some special method of reporting the credit worthiness.  Most of these companies use scores ranging from 300 to 850. Different scores on different models are not directly comparable. It will be very easy for a person with high credit score to get car loans quickly than a person with a low credit score. Usually a person with steady income and good credit score will not find any difficulty in getting a car loan.

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