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:
-
Proof of identity: This includes documentation that we reviewed last lesson ("mortgages")
-
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.
-
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
Takeaways
-
Paying off one's auto loan works relatively the same as a mortgage, and involves pretty much the same requirements
-
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.
-
The main difference is that mortgages use compound interest, while auto loans use simple interest. This makes auto loans financially cheaper.