There are different types of car loans available. The breakdown of some of the different types of car loans is car loan with variable interest rate and car loan with fixed interest rate.
Car Loan with Variable Interest Rates
You and your car loan provider agrees to have the interest
rate change during the duration of your contract or until the car loan is paid
in full with a car loan of variable interest rate.
The change in interest rate may be exclusively left either
to your car loan company's discretion or subject to the approval of the parties
involved. This type of car loan is rather difficult to comply with if you don't
have a head for figures.
For instance, for the first three months, you may be
expected to pay $500 but this would then increase to $600 on the next three
months after that.
Interest rates can sometimes make the difference between
sealing a deal on the car of your dreams or settling for something less. But consider
the many options available for financing an auto loan before you settle.
Car Loan with Fixed Interest Rates
The interest rate shall remain constant throughout the term
in a car loan with fixed interest rate type. Most people who go for car loans
with fixed interest rates prefer it since there's nothing confusing or complex
about its payment scheme.
If, for instance, your car loan is worth $500 with a fixed
interest rate of 10% then every month you're simply expected to pay $500.
The only downside to car loans with fixed interest rates is
when the industry average becomes lower than the present interest rate you're
paying.
If this happens, you unfortunately do not have any option of changing
the interest rate since it's stated in your car loan contract that it shall
remain constant throughout the period.
Typically, it is the best to stick to fixed interest rates in
a period of accelerating interest rates. But not all fixed-rate loans are
created equal.
If you're a homeowner, for instance, you might consider a home
equity loan, which generally carries a lower interest rate than financing through
a car dealer, and for many people, the interest is tax deductible.
Pre Qualified Auto Loans
It is very simple to get pre qualified auto loans. By
applying for pre qualified auto loans you can get a better interest rate before
going for car shopping.
You're protected in the event that rates rise before
you close a deal by pre-qualifying for a loan and locking in a fixed interest
rate. By having the option of financing directly through a lender, you're also
in a better position to negotiate a lower rate from a dealership.
Home equity loan
You will be able to secure an auto loan by offering your
home as collateral. Even though this type of auto loan carries with it the
potential for a higher interest rate, there are some tax advantages that can
offset the costs incurred by the higher interest rate.
Car Dealer financing
Many people take advantage of an option known as dealer
financing. Most auto loans are made with a fixed percentage rate, which is connected
to mostly short-term and intermediate-term government securities called
Treasury bills.
Since last three years, Treasury bill rates have been
tracking the fluctuations. Shorter-term rates typically adjust when the Federal
Reserve either raises or lowers its interest rates.
A rising rate raises your monthly payments on cars, whereas
falling rates reduces your monthly payment on cars. Buyers should be conscious
that car dealers that provide financial services generally mark up the cost of
a loan beyond the rate of the lending institution.
Refinancing Auto Loans
Actually, auto loan refinancing is one of the easiest ways
to save money on your monthly bills. Car Refinancing is the process by which
someone pays off an existing car loan by borrowing a new loan. You can consider
refinancing your auto loan if rates are tumbling.
Even though the savings are not huge, the up-front fees
generally average only about $15 to $25. You can save $18 a month on your four-year
loan, or $432 on the last two years of the loan with a reduction in interest
rates from 7.5% to 5.5% on a $20,000.
Zero-percent financing
Even though, while buying a car a zero-percent financing is
attractive, they need to look at the transaction if they are offered the option
of taking a rebate in its place.
According to CNW Marketing, which tracks the
automotive industry, the average incentive auto companies gave new car buyers
grew to nearly $4,000 in 2004. You can come out ahead with independent
financing with this much of a rebate.
For instance, if you were to
buying a car for $20,000, and take a $4,000 rebate, you'd have to borrow only
$16,000 from an outside lender.
It would cost you $386.86 a month with 7.51
percent, for a total outlay over four years of $18,569.28, which is less than
the $20,000 total you would have paid by opting dealer's offer of zero-percent
financing instead of rebate.
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