How to Finance a New Car with a Car Loan
Auto Loans Provide Financing to Most Car Buyers - How Do They Work?
Mar 13, 2009
While wealthy car buyers may have the luxury of paying for a new car out of pocket, the average person isn’t so fortunate. For most people, the only way to finance a new car is through a car loan – a complex financial instrument that requires much planning and forethought before buying the new car.
The Car Loan Defined
At its most basic definition, a car loan is a personal loan used to finance an auto. It is a secured loan in that the auto is used as collateral for the loan. The car loan can take the form of either an indirect or a direct loan depending on how the car buyer chooses to enter into the loan agreement.
An indirect car loan means that the car dealership acts as an intermediary between the bank and the car buyer. A direct car loan means that a bank loans money directly to the car buyer outside the purview of the car dealership.
In short, the car buyer is free to obtain an auto loan from any lending institution that offers the most competitive deal in terms of financing, interest rates, and loan terms.
While the car dealership benefits financially from an indirect car loan when making the new car purchase at the dealership, the choice is ultimately left to the car buyer.
Car Loan Amortization: Paying off the Auto Loan over Time
For mortgages and auto loans alike, amortization is a financial term used to describe the elimination of a debt over time.
In the case of an car loan, amortization occurs when the car buyer makes monthly payments to his or her lending institution with the intent of zero amortization at the end of the specified auto loan time period.
In the beginning, the car buyer will pay off mainly the interest on the car loan. But as time progresses, the car buyer will increasingly pay down the principal until the entire auto loan amount is paid off.
Numerous factors go into auto loan amortization including interest rate, loan amount, and length of the car loan. Car buyers are encouraged to search the web for amortization calculators to estimate what price they are able to pay monthly for a new car.
Car Loan Length Options
The length of the car loan depends on a variety of factors, the most poignant factor being how much the car buyer can afford to pay on a monthly basis. Options include
- 48-month auto loan (most popular): long enough to provide the car buyer with feasible monthly payments, yet not too short that payments would be too high
- 36-month auto loan: higher payments, but good for car buyers who plan to trade in their car after 3-4 years
- 60-month or 72-month auto loan: good for car buyers who plan to keep their car for 8-10 years and require low monthly payments
A car loan is a complex financial instrument that can be somewhat intimidating and confusing to car buyers who don’t have a firm understanding of the process.
But with a proper understanding of the nature of a car loan, how an auto loan works, what the car buyer can afford, and options including loan length, car buyers can finance their new car with confidence.
See related articles, How to Find a Bad Credit Auto Loan, How to Find Car Loans Online and How Auto Insurance Determines Total Loss.
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