Getting A Car Loan - An Explanation Of Automobile Financing Terms

It's always best to educate yourself on loan terms before
signing a loan contract or even searching for a car loan. This
article explains some common automobile financing terms so you
know what you're looking at when comparing car loans:

Interest Rate

This is the rate of interest you'll be charged on the amount of
money you borrow. Interest rates can be fixed or variable. Fixed
interest rates are set at one amount for the life of the loan.
Variable interest rates fluctuate depending on the prime rate.
So, if you have an interest rate that is set at prime plus two
points, and the prime rate is at 3%, then your interest rate
will be 5%. If the prime rate goes up, so will your interest
rate. If the prime rate goes down, so will your interest rate.
Fixed rates do not change. They are constant through the life
of your loan.

Pre-Payment Penalties

Pre-payment penalties are penalties that you are charged if you
pay your loan balance off in a shorter time than originally
negotiated. So, if you make monthly payments greater than what
you're charged, or if you refinance your car loan, you will be
charged a certain amount that was determined when you signed
your contract.

Loan Term

This is the amount of time that your loan will last. For
example, if you borrow $10,000 on a four-year loan term, you
will have to pay that amount back plus interest in four years.
Most car loan terms are somewhere between two and five years.

Car Insurance Clause

Most lenders require that you keep full-coverage car insurance
on any car that is financed. This way, if the car was totaled,
you would receive the necessary amount in order to pay back the
financing company. Because a car's value quickly deteriorates,
it's advisable to get insurance that pays back the full amount
of your loan. Otherwise, your insurance company may just pay
back the value of your car, which may not be enough to pay off
your loan. You'll then be stuck with a loan payment on a car
you no longer have.


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