May 15, 2009 05:41 PM
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Most of us don’t want or need to be finance experts or scholarlyeconomists, we just want to know the basics to get a good deal on ourauto finance. That is the spirit of this article, to offer the basicsof the subject in a practical way providing the essentials to help yousave money and time on your auto finance package. This is not always aneasy task as you quickly get bogged down in jargon when you deal withtechnical aspects of finance. We will try to explain in layman termsany word that might be considered technical.
What are the basics of auto finance? The basics of auto finance are also the basics of finance ingeneral. The principle is simple, you need a person or company willingto lend money at a certain rate of interest and borrowers that arewilling to pay for the privilege of borrowing money. This brings us toour first technical words, rate of interest.
What is a rate of interest?
Alas, very few people are willing to lend money out of charity. Youcan try with your mom, dad, brothers or friends but I don’t recommendtrying it with banks and lending companies. Rate of interest is thefigure that reflects how much profit the lender is demanding forlending his money. This rate is worked out as a percentage of the totalcapital borrowed. This percentage is paid generally every year, although other business with not so reputable methods might demand amonthly or even daily interest rate. Typically though a 10% rate ofinterest means that every year you pay 10% of the cash you borrow. Soif you borrow$ 10, 000 for a car the first year you will pay$ 1, 000plus the amount of capital you pay off. The second year you will pay10% of the pending capital to be paid. If you paid$ 1, 000 off, youwill pay$ 900 and the corresponding capital and so on and so forth forevery year until the debt is paid.
This is pretty simple term in auto finance. What is a little morecomplicated is the difference between the different types of autofinance.
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 thecar until you have completely paid it. You cannot sell it until youcompletely finish paying for it. These loans often have cheaper ratesof interest because the bank has something to take if you do not paymaking it a lower risk loan.
However the basics are simple to understand. These loans are notbased on the car as a security. The bank lends the cash to theborrower. The borrower can then do what he or she wants with it. Theseloans provide more freedom and flexibility when buying but aregenerally more expensive in the interest rate department.
