Most car purchases involve the purchaser taking out a loan in order to make the purchase. The auto loan is similar to other loans – it has a term (usually 1-5 years), an interest rate, sometimes a down payment and the payment amount.
There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer.
An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.
The first port of call for car buyers should be their bank. Banks issue auto loans based on the customer’s credit rating, job salary and other factors.
It is almost always preferable to obtain bank financing before beginning to shop for your car, just as it is when purchasing a home. In both cases, it increases your negotiating power as you will not be seeking the seller’s financing.
Many auto manufacturers also have financing arms or banks they work with and it is entirely possible for you to obtain an auto loan at the car dealer. However, you should have your own financing in place even if you end up taking the dealer’s financing.
When you purchase the car, you will receive your agreement, receipts and a car note, with your monthly payments spelled out, together with your payment schedule. This will come from your bank if you have your own financing, or from the car dealer.
In some instances, a loan taken out to purchase a new or used car may be secured by the car, similar to the way a mortgage is secured by housing. However, as mentioned earlier the duration of the loan period is considerably shorter — corresponding to the useful life of the car.
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