HOW DO CAR LOANS WORK?

For most of us once in our lifetime; we want to buy a car our DREAM CAR. While we put in great thoughts in the right model, mileage, sedan vs SUV, and which brand of car to go with. How to arrange for finance for the car is also a BIG question one has to think of. Do you want to buy the car cash down or finance the purchase? It’s very important to know and do an analysis of both to take this decision.

Car Loan – the process

In a car-loan; the person buying the car borrows money from a lender who arranges funds to pay for a vehicle upfront to the dealer the car is being purchased from. The Borrower pays the debt in monthly installments; as per the terms. There are three parties involved:

1.      Borrower – the person buying the car

2.      Dealer – the person/entity selling the car

3.      Bank / Financial institution – the lender.

Factors – affecting Car Loan

There are three basic factors affect the overall cost of the loan:

Loan Amount is the amount you borrow. It is also called the Principal amount.

APR: Annual Percentage Rate is the interest rate charged on the Principal Amount and the fees charged by the lender. APR is directly proportionate to the cost of the loan.

Term of the Loan: the tenure of the loan. Car loans are generally 36 – 72 months.

The Right Budget

One has to ensure the right balance between the care one has to buy and the amount one is spending when one is financing it. Just because one is thinking of financing; and will be paying installments which can look like small amounts going out every month but can actually be quite a bit if we don’t calculate the exact amount going out. Sometimes one can get swayed by these small amounts and think of taking a plunge by going for that top model of the car in mind or the car which may be out of budget.

How to save money while taking a Car Loan

These can be some points to keep in mind to lower interest charges in your car loan:

Down payment: you can choose to pay some portion of the amount to be paid for the car as down-payment and only borrow 50% amount so the net outflow of interest is less.

Opting for a shorter term of the loan: while taking the loan; you can negotiate on paying higher installments but taking a shorter tenure of the loan. You will end up paying lesser interest.

Foreclose / pre=pay the loan: a car loan is a simple interest loan on which interest is calculated daily. With such loans; any block pre-payment can reduce the interest outflow.

Get your loan pre-approved:

Getting your loan pre-approved beforehand can ensure you know exactly how much you can spend. It’s the smartest way to decide and plan the finances.

Now that the finance tips are in place; some additional tips are as follows:

1.      Negotiate the price

2.      Check multiple dealers and loan options

3.      A Credit score is an important point to consider when applying for a car loan. You must check what is your score to even think of getting a loan.

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