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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and then wish to pay it off early, either through refinancing the loan or another means, the lender will usually use an outdated and expensive formula, known as the rule of 78s to calculate a rebate of finance charges.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 financing.

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 (SSN)

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 Mortgage Rates

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