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Auto Financing Basics: What You Need to Know Before Buying

Auto FinancingBuying a car can be an intimidating process, as it is not only an expensive investment, but it is a decision that carries with it a certain degree of finality, as you are committing to a vehicle that you may be driving every day for a number of years. But rather than letting the gravity of the decision get to you, you should try to go into the transaction with as much knowledge as you can. Being informed not only about competitor’s prices and vehicle value, but about auto financing as well, can help you get the most out of your purchase.

Basic Terms
As with any area specialized area of business, auto buying and financing have a number of unique terms that are commonly used in the context of these transactions but that those outside of this area might not understand. This makes it difficult for consumers to understand the transaction, giving dealers an advantage. Getting familiar with these terms can help level the playing field.

Amortization: Often used as part of the phrase “amortization tables,” this term simply means paying off a debt through installments. Amortization tables are easy-to-read graphical representations that allow you to see what your payments will be throughout the life of your loan.

Term Length: The term length is simply the amount of time you have to pay back your loan. While shorter term lengths mean that you won’t have to make payments as long, those payments will be higher than monthly payments for longer term lengths.

Add-on Interest: Typically, interest is not an issue for those who keep up with their loan payments. However, add-on interest is a type of interest that is calculated when the loan term begins and is added to the principal so that even if you pay your loan off early, you still end up paying this type of interest.

Refinancing: This is the process of obtaining a new loan to replace an outstanding loan balance. While this does provide you with a means of payment you did not have previously, refinancing is not always a good deal for buyers. In fact, because the car’s value will decline more quickly than the loan principal, you may end up owing more than the vehicle is worth. Plus, a new loan will mean you have more interest to pay and won’t be paying down principal.

How to Avoid Bad Deals
Even if you know every technical auto financing term imaginable, it is still possible to end up on the wrong end of a bargain due to your inexperience. You can try to avoid an unfortunate outcome by bringing a trusted friend or family member with more experience or who works in the auto or lending industry to assist you. You may also wish to break up the transaction if, for example, you know a reliable person who buys junk cars and a trusted bank for financing, so you only have to deal with the dealer for the actual purchase.

The world of auto purchase and financing can seem confusing, but it is much easier to understand after you get some experience. Additionally, consulting a trusted friend or family member can help you make the most out of your efforts.


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