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Auto Loan 101

Have you ever wondered exactly how to get a car loan? Chances are that until you are actually ready to buy a new vehicle you won’t bother finding out how it all works. Unfortunately, if you are one of those people who walks on into a car yard and signs up to an automobile loan unarmed with the basics, you will probably be getting ripped off!

Used car loans are commonly the second largest financial commitment you’ll ever make in your lifetime and so warrant a little bit of research and care. Welcome to Automobile Loan 101!

Lesson 1: The Basics.

There are two main options for how to get a car loan – you can attain one from the car yard on the day that you decide to buy, or you can get finance approved before you purchase. In each case, the finance or automobile loan company will require proof of your identity, your weekly income and will run a credit check on you. Any old debts that you may have defaulted on will show up – it’s a good idea to make sure that old phone bill is paid in full before you apply for credit. With your proof of income, the financier will make sure that the repayments are within your capacity, they want to make sure you can afford the automobile loan and that you’ll pay it back. If the loan never gets paid neither do they!

Lesson 2: Decisions, Decisions.

So many choices when it comes to buying your next car…New or used? Sedan or Hatch? Red or Purple? Hybrid or Gas? These are all vitally important questions. But your car selection can also impact on the success and ease of applying for your automobile loan. New cars lose value quickly and can be overpriced and attract hefty repayments. A used car on the other hand, should be fairly new (2-4 years old) and in good condition. After all, it is your vehicle that will serve as the used car loans collateral. The finance company will want to be confident that your chosen car will last the term of the loan… And so will you, no good paying for a rust-bucket that doesn’t run after a year or two!

Lesson 3: To Buy Outright or Lease.

In many instances, car dealerships and automobile loan companies will offer a lease option as an alternative to buying the vehicle outright. Leases can be a good way of financing your car if is a company vehicle or if driving the very latest model is important to you. On the other hand if you want to purchase your car outright, you’ll need to decide on the length of loan term and total amount you need to borrow. A larger deposit can result in a smaller loan and less repayments over time. Keep in mind that the longer your loan goes on for, the more interest you’ll be paying – in other words, the more your car will eventually cost you.

Lesson 4: Pay Back Time.

Whether you opt for weekly, fortnightly or monthly repayments you should try to keep this amount down to less than 20% of your expendable income. You don’t want to over commit and risk losing your car, and your credit rating. Used car loans financiers will work out the repayment amount based on the initial cost of the purchase, the deposit you have contributed, the length of the loan duration and the interest rate.

Usually automobile loans are considered a short term debt and are designed to be paid back in full within 2 to 6 years. Read the fine print on your loan documentation to see what their stand is on early or extra repayments and lump sum payouts. Ideally, you’d like the flexibility of being able to pay more back when you have extra funds available, thus shortening the overall loan and reducing the amount of interest you will pay.

So now you know a little bit about how to get a car loan you won’t be walking in blindly to what can be a major financial commitment, good luck and happy car shopping!