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When talking about Loans, one must understand the difference between a simple and a front-loaded interest type of loan.
A Simple interest loan breaks your interest payments equaly into even monthly amounts, but only after calculating the interest on the entire loan.
Lenders will prefer Front- loaded inter est loans. It's better for them. The reason for this is truly simple: The interest you pay is bigger at the start of the loan and gets lower towards the end. If for some reason you settle on paying off your loan, or default, then the Lender will have gained a large portion of the interest calculated for the entire amount of the original loan amount already.
When you are offered a loan, here are some of the factors that go into play when calculating your interest rate:
- CREDIT RATING
- LOAN TERM(Amount of time for you to pay it off)
- REGION where you live
- AGE of the car
Your credit rating is EXTREMELY important when it comes to influencing your car loan. So, it is truly important that you review your credit score/rating before you apply for a loan. Keep in mind that whenever you request a copy of your credit report, that this score might change. So, again, know your credit rating!
When it comes to your loan agreement, what you really need to focus on is your TOTAL LOAN AMOUNT. Naturally, you will pay attention mostly to your monthly payment amounts and interest rate. However, you must keep in mind your total loan amount, especially since your interest amount will be based on that.
Long loan terms will lead to higher interest rates. Short loan terms will lead to lower interest rates, however your payments will be higher. Why? Think about it this way: Lenders will let you "stretch out" your payments. They will let you take your time paying off your car. But it won't come cheap. On the other hand, if you want to pay your car off quicker, the Lenders will love you for it, but you still have some interest to pay. Lower payments, but Lenders will still make money off your loan. Car loans usually come with a 5 year window to be paid off.
Pay close attention to car dealership commercials on TV and/or newspaper ads. Negotiate the best price for your purchase in the first place. This will play an important role when negotiating your car loan. Have a car for a trade-in? Rebates? All of this can be used in a negotiation, and it will impact your purchase price. The price of the car itself will play a role when it comes to calculating your loan.
Sometimes there’s a market change, or maybe you paid way too much for the car you have. When the car loan, that you took, exceeds the amount that your car is worth, then you have an upside-down loan. If you borrow too much money, you could end up with an upside down loan.