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Almost a half a trillion dollars in new and used automobile loans are taken out each year. Whether you are borrowing from a bank, a finance company, a credit union or a relative, you'll want to understand auto loan basics.
Tempted by that 0% auto financing ads on TV? Intrigued with that $350 payment offers on that European luxury sedan? If so, after heading down to the dealership you probably found out, like the majority of American car buyers, that your credit score did not quality you for such auto loan terms. The reality is that most Americans will benefit from shopping for an auto loan
before, during and after going to the dealership.
Now, let's start with some of the basic auto loan terms.:
- Installment Credit: An auto loan is a form of installment credit which obligates you to make fixed payments at fixed intervals (usually monthly) over a specified time period. Most installment loans auto or otherwise are represented by binding legal contracts between the borrower and lender.
- Upfront Costs: Also called closing costs, you pay these fees at loan closing. They may include the down payment, any prepaid interest, loan underwriting fees, and fees that you pay for ancillary services.
- Lien: A lien is a legal claim held by a creditor against an asset to guarantee or secure repayment of the debt. Auto loans typically make the lender the lienholder until the auto loan is paid off.
- Loan Collateral: Also called security, loan collateral is an asset that is used to secure the repayment of a loan. For auto loans the collateral is not surprisingly the vehicle itself. For example, if a borrower defaults on an auto loan, house or whatever, the lender has the right to sell the collateral in order to collect on the loan. How much can you borrow? Click here to calculate your auto loan principal amount.
- Default: When you fail to repay a loan under the terms of the loan agreement, you trigger a loan default. This allows the lender to take extra steps to recover the loan principal and accrued interest including re-possessing and even selling the loan collateral. If you're having financial
trouble, contact your lender. Missing one or two payments is better than default. If you've defaulted on an auto loan at some point in the past, read more about bad credit auto loans here.
 So, what requirements do these lenders have when making a loan auto, motorcycle, RV or otherwise?
- Loan-to-Value (LTV). This is the ratio of the loan amount to the value (often as calculated by Kelly Blue Book) of the vehicle you are buying. Lenders will loan you more or less depending on your credit. Buying a used car with great credit? You may qualify for 110%. Looking for a bad
credit auto loan, expect to make a larger down payment as you will receive a lower loan to value.
- Payment-to-Income (PTI). This is the ratio of your monthly auto loan payment divided by you monthly gross income. When calculated on an after-tax basis, this number should be at or below 15%. Auto loan payments greater than 15% carry a greater risk of default. Click here to calculate your car loan payment.
- Auto Insurance. While most states will not allow you to drive a car off the dealer's lot without proof of statuatory minimum insurance, the lender will typically require that you have insurance adequate to cover the value of their loan collateral.
- Automatic payments. While not always required, many lenders provide a slightly lower interest rate for consumers who setup automatic payment deduction from their checking or savings account.
SmartCarCredit can help. Just submit our easy auto loan application. We'll match your profile to the auto lending services provided by our network of lenders and dealers. If you meet their auto lending criteria, they'll contact you with customized auto loan quotes. Many of the dealers on our network also use our CreditSmarts auto lending platform. It provides them a real-time
connection to over 20 banks, credit unions and auto finance companies. This allows them to help you compare auto loans tailored to the car you want while at the dealership
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Disclosure: We developed the content for SmartCarCredit™ while working with automotive industry clients. We hope you find it helpful in making informed decisions. While we believe the information to be accurate, we do not guarantee its accuracy.
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