Before Signing On the Line for an Auto Loan...
Be Sure You Understand the Auto Loan Offer.
Although 90% of all auto loan offers are simple interest loans, there are
some lenders who are pushing loans that are not. A simple interest loan
means that interest is paid, or computed, only on the original principal of
the loan. You should never agree to an auto loan that is not a simple
interest loan.
The other thing that you want to insist on when securing an auto loan is
that the loan be given with no pre-payment penalties. Simply put, this means
that the lender will not penalize you, by charging a fee, if you pay the
loan off early either through refinancing or other means.
It is important to remember that it is always easiest, and refinancing will
save you the most money, when a simple interest auto loan with no prepayment
penalties is refinanced with another simple interest auto loan at a lower
interest rate.
Never Agree To a Pre-Computed Auto Loan
Some lenders offer auto loans that are not simple interest loans at all;
they are what are known as pre-computed loans. Sub prime lenders will often
target high risk borrowers with pre-computed auto loans, and some used car
dealers might push this type of auto loan financing.
If you sign on the line for this type of auto loan, you are legally
committed to paying back the full principal balance of the loan as well as
the total amount of all interest that would accrue over the life of the
loan.
If you agree to a pre-computed auto loan and then wish to pay it off early,
either through refinancing the loan or another means, the lender will
usually use an outdated and expensive formula, known as the rule of 78s to
calculate a rebate of finance charges. Through this rebate you will pay a
very hefty fee for paying the loan off early.
This type of loan allows the lender to apply more of the payment to interest
and less to the principal balance of the loan. A pre-computed auto loan
allows the lender to collect the majority of the interest due during the
first half of the loan repayment period.
Hold Out For the Best Offer
If the first lender that you speak to is not offering a simple interest auto
loan with no pre-payment penalties at a reasonable and competitive interest
rate, walk away with a smile. There are plenty of other lenders eager to
compete for your auto loan financing.
Additionally if you are looking at auto dealer financing, you can negotiate
the interest rate. last year (2004) I purchased a 2004 F-150, I was offered
an interest rate based on my "Credit Score". I started to say no to the
deal, my rate was lowered 3 percentage points on the spot. Dealers do have
room in offering credit, it hits their profit margins however it is your
money they are playing with.
Record low interest rates, and the global lenders marketplace created by the
Internet have led to a competitive lending market. In other words, it’s a
buyer’s market! Check with your local bank, the financing that the
automobile dealer is offering, as well as online resources. Remember to not
only compare interest rates, but look for hidden fees and transfer balances
that my not be apparent at first glance. By thoroughly investigating all of
your options, you can’t help but get a loan that is perfect for you!
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