How do car loans work?
From Car Loan Wiki
Ready to buy a car but can't afford to pay cash? Getting a car loan is the most practical solution if you need a car now. Whether you're financing the car yourself through a bank or financing the car directly through the dealership, this article will help you understand what auto loans are and how they work.
An auto loan, just like any other loan is a type of debt. With any monetary loan, the lender loans a certain amount of money to the borrower, which the borrower must pay back in installments over a certain period of time. The lender also collects an interest on the money they lent the borrower. In the case of auto loans, the borrower finds the car he/she wishes to buy, requests a loan for that amount from a lender, and the lender sends the money after approval.
Basically an Auto Loan is a contractual obligation for the lender to give you a sum of money, and the borrower to return a sum of money back at a later time.
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Types of Auto Loans
Fixed Rate Car Loans
One type of Auto Loan is a fixed rate auto loan. Fixed rate auto loans do not tie into an index. This means that the interest rate of the loan will remain at the same percentage during the entire life of the loan.
Variable Rate Car Loans
The second type of Auto Loan is a variable rate auto loan. Variable Rate Car Loans have a interest rate with can vary or "float" from time to time during the life of the loan. This change of the interest rate is based on fluctuations of the interest rate index. Sometimes variable loans can have caps to stop them from going too high, or collars to keep them from falling too low.
Which Type of Car Loan Should I Choose?
When determining which type of loan you should choose it's best to look at the initial interest rates. If the fixed rate is significantly lower than the variable, it's probably best to go with a fixed rate loan. Of course if you have a good understanding of how the interest rate index works, and you can predict that it will drop, you may be better off going with a variable rate.
