What to Know About Borrowing Money for a Car
If you are in the market for your next vehicle, it is important to know how to get the best possible deal. This means knowing how to get the lowest interest rate on the amount that you borrow as well as focusing on the price of the car instead of the monthly payment. Furthermore, you should know that an auto loan is a secured installment loan and why that matters for your finances.
Installment Loan Vs. Revolving Credit
An auto loan is an installment loan, which means that it has a definite ending date. A credit card or other revolving loan may be referred to as open ended because you may take a few weeks, a few months or a few years to pay off the balance. With an installment loan, you make the same payment each month until the balance is paid off while the minimum payment on a revolving account is based on your principal balance.
Secured Vs. Unsecured Loan
An auto loan is considered to be a secured loan because it is secured by the asset that you are borrowing money to purchase. The same is true with a mortgage or any other loan that you put up collateral to obtain. Since the lender has some assurance that they it can get its money back, secured loans generally come with lower interest rates and other perks for borrowers.
Unsecured loans do not require the borrower to provide collateral prior to obtaining the loan. Therefore, they come with higher interest rates and may only be available to those with good credit. In such a scenario, the borrower’s credit score and history are the only indicators of whether he or she will repay the loan as agreed.
Auto Loans Can Generally Be Refinanced
The terms that you agree to today when borrowing money for a car don’t have to be the terms you adhere to throughout the life of the loan. If you lose your job a year from now, it may be possible to stretch out the loan’s term to lower your monthly payment. Conversely, if you make more money or see your credit score go up, it may be possible to get better terms that make it easier to pay off the car faster.
Look at the Car’s Price Instead of the Monthly Payment
It is important that the monthly payment is only part of what you look at when determining if a car is affordable. In theory, you could buy a $50,000 car and pay it off over 30 years for only a few dollars a month. However, the interest charges would double the overall cost of the car. Therefore, you want to make sure that you only borrow what you can afford to repay in a timely manner with interest and other fees accounted for.
Buying a car can give your greater independence and make it easier to get to work or school without relying on a bus schedule. However, it is important that you only borrow what you can afford to spend and that you take time to shop around for the lowest rate before agreeing to purchase your next vehicle.