Entries Tagged 'Auto Finance' ↓

Auto finance 101, all you should already know

Most of us don’t want or need to be finance experts or scholarly economists, we just want to know the basics to get a good deal on our auto finance. That is the spirit of this article, to offer the basics of the subject in a practical way providing the essentials to help you save money and time on your auto finance package. This is not always an easy task as you quickly get bogged down in jargon when you deal with technical aspects of finance. We will try to explain in layman terms any word that might be considered technical.

What are the basics of auto finance?

The basics of auto finance are also  the basics of finance in general. The principle is simple, you need a person or company willing to lend money at a certain rate of interest and borrowers that are willing to pay for the privilege of borrowing money. This brings us to our first technical words, rate of interest.

What is a rate of interest?

Alas, very few people are willing to lend money out of charity. You can try with your mom, dad, brothers or friends but I don’t recommend trying it with banks and lending companies. Rate of interest is the figure that reflects how much profit the lender is demanding for lending his money. This rate is worked out as a percentage of the total capital borrowed. This percentage is paid generally every year, although other business with not so reputable methods might demand a monthly or even daily interest rate. Typically though a 10% rate of interest means that every year you pay 10% of the cash you borrow. So if you borrow $ 10,000 for a car the first year you will pay $ 1,000 plus the amount of capital you pay off. The second year you will pay 10% of the pending capital to be paid. If you paid $ 1,000 off, you will pay $ 900 and the corresponding capital and so on and so forth for every year until the debt is paid.

This is pretty simple term in auto finance. What is a little more complicated is the difference between the different types of auto finance.

Car dealer loan. These loans are offered by the car dealer himself. The loan is secured on the car you buy. This means that if you “forget” to pay your auto loan you will lose your car. In fact you don’t own the car until you have completely paid it. You cannot sell it until you completely finish paying for it. These loans often have cheaper rates of interest because the bank has something to take if you do not pay making it a lower risk loan.

Personal loans. These loans are different. For a more in detail analysis you can check our previous blog on auto finance contract types.

However the basics are simple to understand. These loans are not based on the car as a security. The bank lends the cash to the borrower. The borrower can then do what he or she wants with it. These loans provide more freedom and flexibility when buying but are generally more expensive in the interest rate department.

Pre arranged auto finance, the way to go.

What does pre-arranged auto finance mean? Why should you consider it?  Let’s paint a picture to describe what happens when we buy a car with finance.

You decide one day that you need a car. Maybe it is a new car, or your first car. You haven’t got the cash to pay for it, especially the car you want to buy. But no worries the car dealer promises a low interest rate and no down payment. So you drive, or walk, down to the car dealer and check out your dream car. You talk technical details, what extras to get and after a few hours you are set to go. You have bargained a little for the price and you are happy with the deal you got. There is just one more detail, to arrange the finance.

At this moment the car dealer has you by the short and curlies, you pretty much have to accept their offer for finance or try and get it elsewhere at this late hour without any assurance that you will get it or that the car will still be there when you get your finance.

It is quite funny that we have got used to this way of buying. A good example of how capitalism has got  a hold of us if we don’t even blink about buying an expensive item we can’t afford unless we get it with a loan that will last for years. Just imagine what you would think if someone went to a supermarket, started bargaining on the price of a liter of milk and once the price was settled left the supermarket to try and find someone who will lend you money or alternatively try and get the supermarket to lend you the cash. You would consider it ludicrous. However that is what we do every time we purchase a car on credit without having arranged for our finance beforehand.

Wouldn’t it make more sense to arrange your cash before you went to the supermarket. Maybe asking your neighbor, father, friend for a small loan and then buying the milk. The same principle applies to car dealers. Just that in the case of car dealers it makes even more sense to arranges your cash before you go.

What is pre arranged finance?

Pre arranged finance involves going to a bank or finance company and arranging for a line of credit you can work with when you choose the car you want. This provides you with a maximum of cash you have available. This is a great way of buying a car. Why?

1) You tend to get a better interest rate and conditions. Arranging for a multi-thousand dollar loan as an afterthought is not the best recipe for a great deal. When you take it easy and look around for a good deal the chances of doing well with your finance increase.

2) You have a much stronger hand when bargaining for a better price on a car when you are effectively paying in cash.