And in order to get the best deal possible when looking for finance to purchase a vehicle, it is smart to get an insight on all the auto loan contract’s terms so you can decide which loan best suits your needs.
An auto loan is essentially a binding agreement between a lender and a borrower who uses the lender’s funds to get a car. The advantage to getting an auto loan is that you don’t have to wait until you save up the entire purchase price of the car to begin driving it. On the flip side, the loan will imply interest charges, which will result in you actually paying more than the purchase price over the life of the loan.
Beyond this simple explanation there are a number of terms and auto loans jargon that you should be aware of so that you are at least armed with the basics of understanding auto loans and how they work.
Loan Amortization
Loan amortization is the reduction of the auto loan debt as regular payments are made towards the principal and interests over a certain period of time. It refers to the repayment of the loan and the consequent continuous reduction of the outstanding debt associated with the loan.
Annual Percentage Rate
The APR is a way of expressing the overall cost of obtaining credit for an auto loan. All consumer loans, including auto loans, must disclose the Annual Percentage Rate as per Federal law. This rate includes not only the interest rate charged for the money lent but also any costs and fees associated with the lending process. When it comes to loan comparison, there is no better tool than the APR to decide which loan is cheaper.
Loan Application
Loan Application is rather simple: You must complete an
auto loan application before a lender can determine how much they will be willing to lend you for your auto loan. It will collect your personal and financial information so that they can assess your ability to pay. Details you will have to disclose are: Your Income, your personal information (name, surname, date of birth, etc.), assets, etc.
Balloon Loan
An
auto loan that provides for small monthly payments in consideration of one large "balloon" payment that must be paid at the end of the auto loan's term. Basically you pay only interests or interests plus a small part of the capital on condition of reimbursing all the remaining capital when the loan is due.
Down Payment
This is the amount of money you pay when purchasing a car and obtaining an auto loan. A down payment reduces the amount of money financed. It’s a lump sum, part of the purchase price that reduces the percentage of the vehicle price that will be financed. It is not always required but greatly reduces requirements for approval, rates and other loan terms.
Principal
This is the amount of the original auto loan made to the borrower by the lender. Every payment you make has a percentage applied to the principal and a percentage applied to the overall interest.
Term or Loan Duration
This is the length of an auto loan. Auto loans are typically financed for 24, 36, 48, or 60 months.
Trade-in Value
This is the value of a car that you want to trade-in when purchasing a new car. The trade-in value is typically equal to what's called the wholesale book value and is then deducted from the final purchase price.
