AUTOMOBILE LOANS

Find:

AUTOMOBILE LOANS

Published by sam - 10/09/07 - 01:09:50 am

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

A loan for the purchase of an automobile is similar in most respects to an unsecured personal installment loan but the interest rate is likely to be lower—perhaps by as much as two or three percentage points. The percentage rate is lower because the automobile serves as collateral and can be repossessed by the lender in case of default.

As automobile prices have continued to escalate the term of an automobile loan has been from the traditional three years to four and as long as five years for new models. Used-car loans are available for shorter terms and at rates as much as two percentage points higher.

Interest and Other Costs

As is true of all loans, the longer the term, the lower the monthly payment but the higher the interest cost. For example, on an $8,000 loan at 11 percent, the total interest charges would amount to $1,429 for a 36 month term but would rise to $2,436 for a 60 month term. Obviously, the most economical plan is to take the shortest loan term you can afford and use as much of your own for as big a down payment as possible, since you are unlikely to earn nearly as much interest on your cash as you are being charged for the loan.

Regardless of the term of the loan, interest rates within the same community may vary by 1.5 percentage points or more. Some conscientious comparison shopping is likely to be worth your trouble. Most automobile loans carry a fixed rate, but some banks offer variable rate loans that may carry lower initial rates but present the same risks as adjustable rate mortgages. Because federal law doesn’t require rate caps or non mortgage adjustable loans caps on variable rate auto loans are rare.

Some banks, in an effort to reduce paper work and prevent late payments, offer a reduction in interest rates if you authorize the bank to deduct the monthly payment automatically from a checking or savings account. This is a worthwhile economy if the bank offers competitive terms on such accounts. But if you have to sacrifice yield on a substantial balance in order to maintain an account at the bank that issues your loan, the interest rate discount you gain may be more than offset by the interest you forgo by keeping you account in the lender bank instead of placing your money where it could earn more. Of course, you may be able to qualify for the lower loan rate by opening a very small savings account and depositing your monthly payment into it instead of mailing it to the bank.

Unlike mortgages, automobile loans do not involve points, but some banks charge the borrower an initial fee—sometimes called a “processing” or “document” fee. This charge can range from $20 t o more than $200 if the bank bases it on 1 or 2 percent of the amount of the loan. Although the Truth in Lending Act requires that this fee be included in the calculation of the annual percentage rate, some bank, in order to be able to advertise competitive rates, fail to comply with this regulation.

Another hidden cost of loans maybe the premium for the fire and theft insurance coverage that the bank insists on in order to safeguard the value of its collateral. Not all owners of new vehicles but this coverage voluntarily, some preferring to self-insure. But even those who choose to buy it should have freedom of choice as to the insurer and the coverage. If the bank does not permit you such freedom, your insurance premiums may be higher than you anticipated.

Other Sources of Automobile Loans

A bank loan is not the only way of financing the purchase of an automobile. Savings and loan associations, credit unions, and some insurance companies offer automobile loans. Automobile manufacturer and dealer financing is yet another sources that, under certain conditions, can be far less costly than a bank loan. Alternatively, you may be able to obtain the money through a home equity loan, which provides for tax deductibility of interest charges but has other major disadvantages. In general, however using your own funds for as large a down payment as possible and paying the balance with a loan for as short a term as possible –even if it requires adjustments of your overall budget—may be the least expensive way to finance the purchase of an automobile.

Bookmark To

Artículos relacionados

September 10, 2007 | Loans, Banking |

No Comments »

RSS feed for comments. TrackBack URI

Welcome to Personal Money Management Expert,the blog where you can find advices to save money and to earn more with each dollar. If you want, it's possible to suscribe by mail and receive all news by e-mail.