Before Signing For an Auto Loan, Be Sure You Understand the Offer
Written by: Mike Cotter
Although 90% of all auto loan offers are simple interest loans,
there are some lenders who are pushing loans that are not. A
simple interest loan means that interest is paid, or computed,
only on the original principal of the loan. You should never
agree to an auto loan that is not a simple interest loan.
The other thing that you want to insist on when securing an auto
loan is that the loan begiven with no pre-payment penalties.
Simply put, this means that the lender will not penalize you, by
charging a fee, if you pay the loan off early either through
refinancing or other means.
It is important to remember that it is always easiest, and
refinancing will save you the most money, when a simple interest
auto loan with no prepayment penalties is refinanced with
another simple interest auto loan at a lower interest
rate.Never Agree To a Pre-Computed Auto Loan
Some lenders offer auto loans that are not simple interest loans
at all; they are what are known as pre-computed loans. Sub prime
lenders will often target high risk borrowers with pre-computed
auto loans, and some used car dealers might push this type of
auto loan financing.
If you sign on the line for this type of auto loan, you are
legally committed to paying back the full principal balance of
the loan as well as the total amount of all interest that would
accrue over the life of the loan.
If you agree to a pre-computed auto loan and then wish to pay it
off early, either through refinancing the loan or another means,
the lender will usually use an outdated and expensive formula,
known as the rule of 78s to calculate a rebate of finance
charges. Through this rebate you will pay a very hefty fee for
paying the loan off early.
This type of loan allows the lender to apply more of the payment
to interest and less to the principal balance of the loan. A
pre-computed auto loan allows the lender to collect the majority
of the interest due during the first half of the loan repayment
period.Hold Out For the Best Offer
f the first lender that you speak to is not offering a simple
interest auto loan with no pre-payment penalties at a reasonable
and competitive interest rate, walk away with a smile. There are
plenty of other lenders eager to compete for your auto loan
Record low interest rates, and the global lenders marketplace
created by the Internet have led to a competitive lending
market. In other words, it's a buyer's market! Check with your
local bank, financing that the automobile dealer is offering, as
well as online resources. Remember to not only compare interest
rates, but look for hidden fees and transfer balances that my
not be apparent at first glance. By thoroughly investigating all
of your options, you can't help but get a loan that is perfect
for you!Be Careful with Your Social Security Number
When shopping for a loan, be careful not to give all the lenders
your social security number. The lender you select will
ultimately need your SSN but if you give it to all potential
lenders, they will pull your credit report. When other creditors
see a large number of inquiries, it may look like you are in
financial trouble and desperate for loans.
Most, if not all, car lenders establish their interest rates
based upon your credit score. So if you give your SSN to a
potential lender, get the lender to agree to give you the credit
scores that they obtain when they pull your credit report. (You
may be able to get a copy of your credit report if you ask.) You
should get all three scores; Experian, Transunion, and Equifax.
Then when you are negotiating with potential lenders, you can
tell them your score and they can quote you a rate without
pulling your credit report.
About the author:
Mike Cotter has been a professional lender for over 30 years. He
began his career in the commercial banking industry in 1972 and
steadily progressed to become Vice President of Retail Banking
with a major Denver bank. In 1982 he opened his own commercial
bank and served as President and CEO for 10 years. In 1992 he
left commercial banking for the mortgage banking field. Rocky Mountain
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