The ultimate Guide To Car Loans And Vehicle Finance Deals

Perhaps the simplest option is to go for a personal loan from a bank. APR (Annual Percentage Rate) can vary, but essentially the way this works is the interest you pay on the amount you borrow.

These are normally to a maximum value of £25,000 and over a ten year repayment period. One thing to note is that your credit status can dictate the maximum value you can borrow along with the APR itself.

A better credit rating means you’re more likely to have to pay less in the long run as there is less risk for the loan provider.

Check the APR as this makes a huge difference.

Understanding Car Loan Interest Rates

When purchasing a car, unless it is brand new, it is recommended to run a vehicle data check. It’s fairly cheap to do could well help you spot a bad buy.

Consider putting down a larger deposit. This will reduce your monthly repayments when it comes to your loan, which can be very useful.

Perhaps most importantly when considering finance, choose the right car for you. Remember that you are getting into debt for what could be a significant amount of money so it is important that you’re happy with your purchase.

Should the worst happen and you fall behind on your payments, do not panic. Talk to the loan provider, they may be able to arrange something to help you. Alternatively, seek financial advice from a specialist, your bank and the Citizens Advice Bureau.

One thing almost everyone does at some time in their life is take out a loan to buy a car. While everyone wants an attractive low interest rate few people know the factors used to determine the rate they receive. For the institution financing any loan comes down to a simple question: What is the likelihood default? The method used to determine the likelihood of default is made up of many variables; some are within your control and some are not.

Within your control is the first determining factor your credit score. Your credit score is basically your payment history on other debt converted into a number. This number represents what kind of risk based on your payment history it is to loan you money. The second is your debt to income ratio. To understand this ratio you must add together your pre-tax income from all sources and multiply it by 36 percent. This 36 percent is the amount of money you have to pay your monthly debt. From that total you must subtract all of your current monthly debt payments such as rent or mortgage, credit card payments, and other loan payments. The amount left over is what you have available to pay a car loan. The higher the loan takes you to the threshold of that 36 percent the higher a risk you are.

Other factors you control are the car you choose and how long you will take to pay the loan back. Used car loans have a higher interest rate than new car loans. Used cars are more likely to have owners throw up their hands and walk away because of problems with the vehicle. Often people stretch out the payments on vehicles they cannot really afford to fit within their debt to income ratio. Longer loan terms increase your interest rate because being under burdensome debt becomes exhausting and many people just give up. The longer you have to pay for something the more likely you are to default.

Affecting interest rates outside your control is the prime lending rate set by banks. The prime rate represents the lowest interest rate offered for a type and length of the loan. Any conditions other than optimal on your part drive the rate up from there. Although each bank sets its own prime rate they all follow the Federal Reserve rate, after all a bank cannot loan you money for less than they are borrowing it for. Fortunately, the current trends of the Federal Reserve rate with car loans following is to keep interest rates low and loans fairly easy to secure. Loan rates have dropped and remained constantly low for the last couple of years and by all indications will remain low through the rest of 2013 and beyond.

If you are not able to secure the rate you wish understand that most car loans are simple interest loans. Simple interest is calculated using only the amount of principal owed each day. This means you benefit greatly and reduce the total amount of interest you pay over the life of the loan by making any additional contribution towards the principal. If you intend to make additional contributions towards the principal and paying the loan off early be sure to ask if there is any prepayment penalty.

This type of loan is secured against a property so you’d need property to secure it against.

A longer repayment period and a higher maximum value can be borrowed with this type of loan but obviously comes with the risk that you property could be repossessed by the bank should you default on the loan! Not really worth risking your home for an expensive car.

Generally speaking, when you go to buy a new or used car, the dealer will either have their own credit provider or be linked with an established company.

When a dealer offers you credit, look over all of the paperwork very carefully. You may find it a good deal, or alternatively choose to arrange a loan through your own bank, depending on what sort of APR is being offered.

The basics About Car Loans That Every Borrower Must Know

Car loans are different from personal loans because when you seek finance for buying a car, the car itself becomes collateral for the loan.

After choosing the car, buyers look for the best financing options and reach out for lenders who are willing to provide quick funds. Just as much important it is to choose the right car; it is equally important to choose the right lender who not only offers the best rates but also matches the terms according to your needs by balancing the loan with your budget.

Car loans are very popular because only a few buyers can afford to pay cash for the full price of a car, whether new or used car. Car loan rids you of all worries about financing, and the process is easy, convenient and fast especially if you involve a finance broker that can offer a wholesale rate of interest which is definitely better than the best that you could get by contacting lenders directly.

Although you can enjoy the car right from the first day, you become its owner only after you pay back the loan because until then the lender holds the title of the vehicle. In this section, we will discuss the building blocks of car loans.

Loan cost or monthly payment

The monthly payment that you make comprises of the loan cost made up of the principal amount and interest. The principal amount is the balance loan amount which will be lower than the cost of the vehicle because rarely there is 100% funding by lenders and car buyers must make some down payment.  The tenure of the loan determines how much monthly principal payment you must make.

Interest rate

The interest rate is also known as Annual Percentage Rate (APR) is the cost of borrowing money which includes the costs incurred by lenders, risk coverage and profit margin of lenders. After being very low for many years, the auto loan interest is now near normal. A number of factors influence the interest rate, some of which are within your control and most being driven by the forces of the financial market. The duration of the loan, the type of vehicle you are buying and your personal credit history are some factors that affect the interest rate. For the same vehicle purchase, different lenders can offer different interest rates.

Floating and Fixed interest rates

The interest rate can either be fixed or variable. Fixed interest rate entails paying the same interest throughout the loan period while variable interest means that the interest can change periodically, either increase or decrease, depending on the market and economic conditions. Fixed interest rate is better for planning repayment by setting aside a fixed sum of money.

Loan term    

36 months to 48 months used to be the normal loan duration that has now gone up to 60 to 72 months as cars have become much more expensive. Longer payment terms attract higher interest as the duration of risk is also longer.

As you keep making monthly payments, the payment amount reduces slightly as the loan balance declines.

PCP (or Personal Contract Purchase) is an alternative way to buy a car.

It’s actually a good way to get a higher priced vehicle but at a cost. Simply put, PCP can be better for some people as it includes road tax, sometimes maintenance too and comes with fixed monthly payments that are quite often lower than other forms of finance.

The drawback comes from the fact that once you paid off the initial period, there’s a balloon payment at the end, called an ‘optional final payment’. It’s at this point that you can hand the car back, pay off the money and keep the car or use it as a deposit on a new vehicle.

The choice is entirely yours. Overall, PCP tends to come with lower monthly costs associated but a higher total payable when the optional final payment is taken into consideration.

Peer-to-Peer auto lending is gaining traction and more institutional investors are coming up and investing in these platforms.

However, P2P auto lenders are making some common mistakes that should be avoided. Peer-to-peer auto lending seems to be the ‘Airbnb’ of the car loans. With adequately high credit, a borrower could obtain the cash he requires for buying the vehicle outright and then he could repay his private benefactor over some time, saving money typically, in the process. Peer-to-peer loans are known to be operating by completely different rules that help to make the borrower’s life a lot easier. We understand that P2P loans are supposed to be unsecured implying that your vehicle is not supposed to be at risk of getting repossessed. However, it is legitimate for conventional banks to repo your vehicle provided you start faltering or falling behind on your auto loan payments.

As per forbes.com, P2P lending seems to involve remarkably more liquidity and credit risks. Nevertheless, investing in P2P auto loans would be offering great scope for diversification and much-enhanced returns. Let us discuss some of the mistakes that P2P auto lenders are making and that should be avoided for success.

Mistake: Inadequate Diversification

Diversification is considered to be a fundamental building block of any auto investment portfolio. You must know that investors are constantly using mutual funds, bonds, stocks, and other such asset types for effectively diversifying their portfolio. P2P auto lenders are focusing on diversification by investing their money in various loans. You must consider investing in a minimum of 200 different loans as diversification is an effective way of reducing the risks of delinquency as opposed to when you invest in just a single loan. No diversification or little diversification could be adversely impacting a lender’s overall returns. It is advised by financial experts to distribute the risk by effective fractionalisation of investment amount between different borrowers.

Auto loan investors who are looking for higher returns must choose their loans with the utmost care and examine the loans individually.  A wise investor would be considering investment across diverse loan grades, loan purposes, vintages, geographies, and lending platforms. We understand that institutional investors would have to pay more attention to platform and loan diversification since each lending platform would be having different characteristics. By effective diversification between platforms and borrowers, P2P auto lenders are successful in optimizing returns and boosting investment performance.

Mistake: Madly Pursuing High Returns

Many auto lenders do not seem to remember that higher returns could be associated with more risks. While a 40 percent interest rate may entice you, you must realise that getting high returns is certainly not the only aim of lending and that is not supposed to be an ideal approach for auto lenders. It is also, of pivotal importance to effectively measure success before investing again in the same type of financial product. If you wish to establish a long-term stable portfolio then, it is essential to take baby steps during the initial stages. In this context, experts point out that a sensible portfolio would be having a completely balanced blend of P2P loans, mutual funds, and even fixed deposits for ensuring safety. Diverting all your savings   towards investing in peer-to-peer auto lending could backfire. On principle, higher returns are generated by riskier investments. It is believed that the risk level of an investment would be correlating with its level of returns. However, you need to keep in mind that all auto lending investments entail some risk but understanding the fundamental strategies like allocation and diversification could be boosting the performance of the overall loan portfolio.

Mistake: Focusing Only On Short-Term Returns

This would result in missing out on the impact that compounding would be having on your returns once re-invested. Several auto lenders would be withdrawing their monthly returns. However, if they focus on a long-term strategy then they could obtain impressive returns on this type of asset class investment.

Mistake: Ignoring Default or Delinquency Rates

According to the existing regulations, all peer-to-peer platforms must disclose their delays and default rates. However, numerous auto lenders on this platform ignore this aspect. But it is of pivotal importance to understand the default and delinquency rates as that should give a much better idea regarding all the associated risks and would mentally prepare for delays.

Mistake: Lack of Knowledge

Investors know superficially that peer-to-peer platforms provide high returns. However, it is vital to understand and have a sound knowledge about the working of the platform so that the investor could go on investing or lending perfectly. You must do adequate research about the P2P platform, loan tenures, products on offer, ROI, borrower verification, mode of investment, etc.

Mistake: Investing in Just One Single Platform

By investing in only one platform, investors would be committing all their funds to one specific underwriting standard. These investors must believe that their investment criteria could match with only one single lending platform. However, there exists a plethora of lending platforms today. Investors must not make the mistake of putting all their eggs in the same basket. This way they are exposing themselves to greater risks.

Mistake: Using Simple Filters

A wise investor would be choosing his loans according to the risk tolerance level. For limiting the exposure to risk, today numerous investors are using filtering as an effective and fundamental investment stratagem. There is absolutely no doubt that utilising simple filtering techniques could be useful in detecting basic weak spots that are present in loan grade assignments. While custom tailoring an investment stratagem, investors would be striking a balance between coming up with a restrictive filter and creating an oversimplified one. If you create an oversimplified filter, it could boost your exposure to far more potentially risky loans and even restrict your returns. However, when you create a very restrictive filter, it could end up preventing the investor from putting adequate capital to work.

Conclusion

An investor must take proactive steps in allocating the capital as per his risk tolerance level. Most traditional banks are supposed to be highly-regulated hence; they seem to have a relatively lower risk tolerance level. A peer-to-peer auto lender must focus on diversifying his funds across various loans so that his exposure to risk is pretty low.

The BIG Glossary of Car Loan Terms and Definitions

Annual Percentage Rate (APR)

An annual percentage rate (APR) is the annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.

Auto Equity Loan

Often referred to as a ‘car title loan’, is a short-term loan in which the borrower’s car title is used as collateral. The borrower must be the lien holder (i.e. own the car outright). Loans are usually for less than 30 days. If the loan is not repaid, the lender can take ownership of the car and sell it to recoup the loan amount.

Bad Credit

A bad credit is a qualification of an individual’s credit history that indicates that a borrower carries a higher credit risk. A low credit score indicates bad credit, while a high credit score is an indicator of good credit.

Bill of Sale

A bill of sale is an official document, made by the dealer or seller, to record the sale of a vehicle.

Black Book

Black Book is a list of information that determines the price or value of a vehicle. This method bases the value of a vehicle on information gathered from wholesale vehicle auctions.

Blue Book

Typically known as Blue Book Value, this is simple the value of a vehicle as determined by Kelley Blue Book, Inc.

Cosigner

A co-signer is any person or party who uses their own credibility to help you be approved for a loan. If you do not pay on time, or if other issues arise, the matter becomes your cosigner’s responsibility as well as your own.

Credit

A term often used to mean credit history. Your credit history shows banks or potential lenders whether you are responsible enough to handle a loan.

Credit History

A record of a borrower’s responsible repayment of debts.

Creditor

A creditor is a person or company who loans funds to other individual or business.

Damaged Credit

This is often called bad credit or poor credit. This is any credit score below the average score. This is the result of late payments, repossession, foreclosures or bankruptcy. Although it is not good to have a low credit score, you can still be approved for an auto loan with bad credit.

Debt-to-Income (DTI)

This is a ratio used to compare someone’s debt to the amount of income that they earn.

Default

To default is to break a credit agreement, usually referring to not paying bills.

Delinquency

Delinquency is to miss or pay car payments late.

Depreciation

This is a term used to describe the loss of value in a vehicle as it ages and takes on typical wear and tear.

Disclosures

A disclosure is any information that is given to customers describing damage or incidents involving a vehicle that they wish to purchase.

Down Payment

A down payment is an amount of money required to lower the price of a vehicle before beginning monthly payments.

Equity

This is the funds paid on a loan. If your vehicle is more valuable than the remaining debt of your loan, you have positive equity; otherwise it is negative equity.

FICO Auto Credit Score

Credit reporting agencies are now using a report called your FICO auto credit score. It lists all of your past auto loan credit history that is required for a lender to make an accurate appraisal of your ability to be responsible with auto loans.

Finance Charge

A finance charge is the calculated total amount of interest that you will pay for an auto loan.

Grace Period

A grace period is a stretch of time from a payment due date. During this time, you can be late on your payment with no penalty.

Gross Monthly Income

This is the total income gained monthly, without any deductions such as child support, tax payments, etc.

Interest

Interest is a fee paid for the use of another party’s money. To the borrower it is the cost of renting money, to the lender it is the income from lending it.

Interest Rate

The annualized cost of credit or debt-capital computed as the percentage ratio of interest to the principal. The interest is agreed upon by both the lender and borrower prior to entering into a loan.

Late Payment

A late payment is simply a payment made after the due date dictated by the lender.

Lien

A lien is the creditor’s conditional right to ownership against the debtor’s asset that bars it from being sold or transferred to another party without paying off the debt owed to the creditor. A finance company has the right to take possession of a vehicle until the debt is paid in the situation of a lien.

List Price

The list price is the price suggested by the manufacturer. It is also known as “MSRP” or “Sticker Price.”

Net Income

This is a borrower’s total yearly income after subtracting federal and state taxes.

Payment-to-Income Ratio (PTI)

This is a calculation showing the percentage of a borrower’s income that they will need to fund a loan.

Proof of Income

A proof of income can be a bank statement or pay stub that proves the presence and value of a borrower’s income.

Proof of Residence

A proof of residence is any official document that shows the borrower’s current home or living space. A driver’s license is one of the more commonly used proofs of residence.

Refinancing

This is when a borrower re-negotiates their loan with a new lender. This can help to lower payments and sometimes even lower the total cost of a loan.

Repossess

Repossession usually occurs when a borrower defaults on their loan and seems to have no intention of paying their debts. The lender will seize the vehicle.

Stipulations

Stipulations are any documents that a lender may require to approve a loan. These may be proofs of income, proofs of residence, etc.

Tax

Vehicle taxes are funds paid to the state or federal government to satisfy the yearly financial requirements to own that vehicle.

Term

A fixed period for which a loan is issued. This is the amount of time in which the borrower agrees to pay off the debt to the creditor.

Title

A title is a legal document that acts as proof that an individual owns a specific vehicle.

Title Certificate

This is an official document that can only be provided by your local DMV which states that you own the title to a particular vehicle. It is also called a pink slip.

Trade-in Value

This is the amount of money that a vehicle is worth when traded in at a specific dealership.

Upside-Down

This term used to signify when a vehicle is worth less than the remaining debt on the vehicle loan.

Sources:
dmv.org
investopedia.com
wikipedia.org