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Car Loans 101

Two Types of Car Loans:

Secured Car Loans - A secured car loan means that you have put something up as collateral against the money that you are borrowing. For instance, you are putting up your house, or something of high value. These loans usually yield a lower interest rate, due to the fact that you have anted up to the lender.

Unsecured Car Loans - An unsecured loan is given out by the lender at a slightly higher interest rate. You have not risked any of your assets, and are credit worthy in the eye’s of the lender.

Top 5 Terms You Need to Know

Annual Percentage Rate (APR)
The Annual Percentage Rate (APR) is a yearly rate of interest that includes all of the fees and expenses paid to acquire the loan. Federal law requires lenders to disclose the APR. The APR is essentially the ONLY rate you will need to compare one loan (of the same length) with another, because it includes all of the costs associated with acquiring the loan. This makes it very easy for anyone to compare most loans.

Down Payment
The down payment is the total amount of money that the borrower puts down towards the purchase of a vehicle at the time of purchase and origination of the loan. This does NOT include any credits for trade equity or rebates and incentives.

NOTE: The down payment is credited to reduce the final sales price of the vehicle AFTER it has been adjusted to reflect taxes, trade inequity or any other expenses. Many people forget to factor this in.

Interest Rate
The interest rate is a part of the APR equation. Interest is the annual rate of return that the lender receives on the Principal of the loan. The interest rate is really relevant to the lender, while the APR relevant to the borrower. This is how the lender determines how much they are making on the loan.

The interest rate is also the cause of more confusion about auto loans than any other single factor. People tend to compare the interest rate when they should be comparing the APR. REMEMBER: --The "INTEREST RATE" is primarily relevant to the lender. --The "APR" is primarily relevant to the borrower.

Loan Term
This is the length of the loan, usually broken down into months (24, 36, etc.). While it is true that the longer the "Loan Term", the lower the monthly payment, increasing the length of the loan to lower the monthly payment should be done with a great deal of caution. Getting the lowest APR is the "Golden Rule" of auto buying, not simply getting the lowest monthly payment.

While many people increase the length of their loan to get a lower payment, we do not usually recommend it. This leads to more debt, substantially more interest and frequently, a trade inequity if the vehicle is traded in during the first three years

The amount of the auto loan, without the interest factored in. In other words, the amount you are financing, the amount that you WILL be paying interest on. This is arrived at in the following way:

Determine the vehicle's final sales price: ADD all relevant fees (taxes, titling obligations, trade inequity, etc.) SUBTRACT amount of down payment (if applicable) SUBTRACT any trade equity (if applicable) SUBTRACT any rebates or incentives (if applicable)

The number that you reach after this process will be the principal. This process may vary slightly from state to state, based on how the final sales price is determined for that particular state (vehicle) sales taxes. MOST states tax on the sales price prior to any reductions (the highest amount). SOME states will allow the final sales price to be reduced by equity of the trade PRIOR to determining the (vehicle) sales tax.

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