Auto Loans
What are Auto Loans?
When you think of auto loans, think of the word "auto." One thing that might've popped to your head was a car. An automobile. An auto loan is basically just what it sounds like. A car loan. An auto loan allows you to borrow money (once again) from a lender to purchase a car.
How do you qualify for an auto loan?
The following are requirements to be able to qualify for an auto loan:
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Proof of identity: This includes documentation that we reviewed last lesson ("mortgages")
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Proof of income/insurance: Lenders (ex: bank) want to know if a buyer is able to pay them back for their loan. Thus, they typically would like to loan to people who are financially secure. Lenders will look at your credit scores; which is recommended to be around 660 (or more). Lenders may also examine your credit/banking history (when you open up accounts, make payments, etc). Finally, they also may review your proof of residence, your insurance, and other forms of income verifications (ex: bank statements), which could affect their ultimate decision.
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Method of down payment: Down payment is the sum of money a buyer pays in the early stages of purchasing a good. Down payment is a mere fraction of the cost of a good/service ranging from 3-20%. You need to understand how much money you are comfortable paying as an up-front cost (down payment) before mortgaging your good. This way, you are able to reduce costs in the long-run.
Note: You need to understand that you also are required to pay additional interest for your loan. ​This type of interest is called simple interest. Simple interest, unlike compound interest, is better for a buyer, who pays less interest in the long-run. Simple interest is calculated based off of the initial amount of the loan. The following is a calculator to find simple interest: https://www.calculatorsoup.com/calculators/financial/simple-interest-calculator.php
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Takeaways
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Paying off one's auto loan works relatively the same as a mortgage, and involves pretty much the same requirements
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You can also use the 28/36 rule in the "Mortgages" page to pay off a loan and other debt you may have. However, don't feel the need to be bound to this rule. You should do whatever fits YOUR needs.
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The main difference is that mortgages use compound interest, while auto loans use simple interest. This makes auto loans financially cheaper.