An Introduction to Car Loans

A car loan is a type of installment loan. An installment loan is a loan where the total amount, including interest, is divided into a fixed number of equal periodic payments.   With a traditional auto loan, the bank holds the title to the vehicle as collateral against the debt. Typically, a down payment is required, usually 20% of the total sales price of the automobile. Some banks will offer “100% financing”, or no down payment.

While there are many different types of car loans available, the best thing to do is to finance for the shortest term possible. It is recommended to choose a 24-month or 36-month loan rather than a 48-month or longer loan. There are now 60-month installment loans available, which can be tempting because of the low monthly payment; however, this type of loan can cause a circumstance called the “upside-down loan”, in which the amount you owe is greater than the value of the vehicle. This can cause problems when you go to resell your car or trade it in. You will also end up paying more interest with a longer loan than you would with a shorter loan.

For people with bad credit, financing a vehicle is a little more difficult. Lenders consider anyone with a credit rating under 600 to be a risk. Some lenders will not offer loans to people with low credit scores at all, while others will offer financing at higher interest rates. There are a few options for you if you have bad credit. You can wait until you are able to pay off delinquent accounts and increase your credit rating before you apply for an auto loan, or you can go ahead and get a loan at the higher interest rate, and refinance later at a lower interest rate when your credit score improves. There are a lot of lenders now that offer financing to people with bad or no credit; many of which can be found online. Some dealerships also offer bad credit financing as well. Don't settle for the first offer, or you may be losing money. Get several quotes before you make your decision on a car loan.