Buying a car with loan money is common and relatively convenient, as you can quickly get to the menus without saving money. Buying or replacing a car will often give you a small cut in your budget, but with a smart payment plan, the overall cost of the loan will remain moderate. An important part of applying for a car loan is careful bidding.
A car loan is a consumer loan under the Consumer Protection Act that is taken out for purchasing a car. Financing a car with loan money is common, about half of people planning to buy a car wanted to buy a car with loan money.
The good thing about a car loan is that after an approved loan application you will get a car available quickly. If the need for a car suddenly surprises you and you can’t finance the car with your own savings, a car loan will get you a quick ride. Regardless of the purpose for which a loan is sought, a careful loan comparison process should always be performed. In addition, the borrower should determine what factors affect the total cost of the loan.
The downside of using a car loan is that using the money loan to buy a car raises the car’s total price to a higher level than its current purchase price. In addition, it is advisable for the borrower to take the view that the value of the car decreases while the loan is repaid. The value of a car will, of course, decrease regardless of the method of financing, but special attention should be paid to this if you buy a car with a loan. When designing a repayment program, it is worth keeping in mind the factors that influence the car’s resale value. The make, model, year of manufacture and mileage of a car make a significant difference in the car’s resale value.
Typically, a middle-aged man applies for a car loan.
Many people planning to buy a car have found a loan offer that suits their needs through the loan comparison service. Free service will ask you for some basic information, and then get customized car loan quotes from different banks. Using the service does not oblige you to accept or make any commitment to loan offers, but you are free to familiarize yourself with the loan market offerings.
Based on the data collected, a typical car loan looks like this:
- 70% of borrowers are men and 30% women.
- The average age of borrowers is 37 years old.
- The average car loan is 8,314 dollars with a maturity of 5 years and 2 months.
Are you considering applying for a car loan? Keep these things in mind
The car loan is repaid in monthly installments, which are largely determined by the loan repayment period. The longer the repayment period, the smaller the monthly installments. However, long payback periods should be avoided as the interest rate on the loan significantly increases the total cost of the loan.
In car loans, it is common for the last installment to be significantly higher than the other installments. For example, if a loan of USD 10,000 is applied for a five-year repayment period, the final installment may be in the order of USD 3,000, with other installments of USD 200-400. This payment arrangement allows for small monthly installments in the early stages of the loan and makes it easier to sell the car even if the loan is outstanding, as the proceeds from the sale of the car can be used to pay off the last installment. The borrower usually has the opportunity to make a separate payment plan with the lender for the last installment. However, there are a few things that should be considered in this payment arrangement:
- The decline in the value of the car can be surprising and lead to a situation where the money from the sale of the car does not even clear the final payment.
- The total cost of the loan may increase as small monthly installments stretch the loan period and interest costs are always calculated on the outstanding loan principal.
It is important to remember that although the last one-off payment covers almost one-third of the total loan amount, the interest cost initially amounts to the entire loan amount of USD 10,000.
Always check the current annual interest rate of the loan
When assessing the total cost of a loan, the loan margin is also crucial. The margin is the percentage of the total loan capital at which the lender will be remunerated for the money he borrowed. More important than the margin is the actual annual interest rate of the loan. Regardless of the type of loan, the lender is legally required to declare the current annual interest rate of the loan, which includes all borrowing costs. These costs include:
- Opening, maintenance and account management fees
- The advertising costs to be paid when paying off the loan
It is always a good idea to find out the current annual interest rate before accepting a loan offer. Sometimes loan quotes can look confusing, as the most prominent loan details usually list only the monthly installment and the margin. While looking at a loan offer, the margin of 6% may seem attractive, but with different service charges, the effective annual interest rate may reach up to 8%. A change of one percent between the margin and the current APR is reflected in the total cost of the loan as a difference of several hundred, as shown in the example below, calculated for the loan amount of USD 10,000.
6% / 12 months = 0.005
0.005 x 10,000 USD = 50 USD
5 years interest accrues: USD 3,000
Annual percentage rate of charge: 7%
7% / 12 months = 0.006
0.006 x 10,000 USD = 60 USD
5 years interest accrues: USD 3,600
The above calculation shows that a difference of only 1% between the margin and the APR will bring the difference of USD 600 over the entire loan period. This does not seem like a great deal in the long run, but it is a good illustration of the way in which the total cost of a loan will only become apparent once the APR has been calculated.
Loan comparison service communicates all the factors affecting the cost of a loan as transparently as possible. For example, we do not offer loans to users of our service which do not have a predetermined repayment period. Compare car loans safely here.