Most people are not able to afford a new car outright but that doesn’t mean they can afford a used car outright either. With that in mind, any person who wants to purchase a vehicle will need to take out a car loan that will finance the vehicle. There are several lenders a person can go through such as a bank, finance companies and credit unions; many of these places will specialize in vehicle loans. It’s not uncommon for dealerships to finance the loan as well.
Buying A Car: How The Vehicle Loan Process Works, How It Affects You
Before you sign anything, you should have an understanding of how the loan process works. Bear in mind that used car loans are a bit more complicated than new car loans, and it’s not uncommon to pay a higher interest rate for your vehicle. Why is that? The lender’s rationale boils down to two things:
1 – Your vehicle will break down before your loan is paid off.
2 – You, the borrower, will default on that loan.
For that reason, you should speak with several lenders to see what interest rates are the best. Never go with the first lender to be your vehicle car loan holder.
A lender will determine the used car’s value, basing it on one of several guides. To ensure that the value amount the lender has is right, it’s best to check it out for yourself. You need to look into whether or not there are prepayment penalties or term modifications. You also need to look into the issue of what happens if you default. A car loan can be very confusing and you don’t want to have any surprises creep up on you in your signed contract.
The majority of dealerships have some kind of institutional financing they depend on. If you choose to purchase a vehicle from a private seller, they may be willing to hold the loan themselves. In most private car seller cases, they tend to want the entire price of vehicle upfront. However, some sellers may be agreeable to a used car loan. It’s important that you and the seller are careful with how things are handled including payment schedule, interest rates and what happens if a default should occur (this should be written out).
The terms of your used car loans will also be based on your credit rating and history. If you have bad credit or not so good credit, the loan terms are going to be stricter. You will be subjected to a higher interest rate compared to someone who’s got impeccable or good credit. Not only do you have to worry with a high interest rate when you have bad credit but you have to deal with the possibility of a down payment or a large monthly payment.
When the economy goes south (bad), it can be extremely difficult to maintain your used car loan payments. If this happens, you might be able to refinance your vehicle. It would be in your best interest to send off a hardship letter to your lender, asking them for the refinance and why. Since a used vehicle is difficult to sell, the lender may decide that refinancing your vehicle is better than you going into default. Always send the letter before you realize you can’t make a payment.