Ebiz247.com Guide To Automobile Loan Information

Next to buying a home or funding your children's education, buying a car is the most expensive purchase you'll make. And car-related expenses, such as gas, maintenance and insurance, can take a big bite out of your wallet.

Once you have made the decision to purchase a car, you may need to seek financing. There are several ways to finance your vehicle purchase and you need to research the different options before you sign on the dotted line.

The world of auto lending and leasing has become both harder and easier in the past few years. There are more different types of loans than ever to compare, but more tools than ever allow you to make those comparisons.

Most auto loans are very similar in structure to fixed-rate mortgages -- they have a set period and a set monthly payment, and are secured by the asset, in this case the vehicle. If you fail to pay the loan, the vehicle can be repossessed.

The fact that auto loans are secured loans gives lenders some assurance they will get something from you even in the worst case scenario. That makes them willing to lend money at lower rates than they will for unsecured loans, such as credit cards, but at higher rates than for mortgage loans secured by homes.

With rare exceptions, auto loans are amortized loans, with each monthly payment split between interest and principal. The portion of the payment devoted to principal is tiny at first, and then gradually rises as the loan ages.

If you do decide to finance through the car dealer, you can negotiate the interest rate. Dealerships usually have several loan sources, including local banks and the manufacturer's credit company. Each source sets their rates to the dealer.

It is important to investigate other sources for an auto loan (such as your bank or credit union) before you sign on the dotted line. Investigate your financing options and find out from banks or credit unions if they have any special deals right now.

Another possibility is a home equity loan or line of credit. With a home equity loan, you are borrowing against the value of your home. Not only are interest rates lower than those for auto dealer loans, but the interest on home equity loans and lines of credit are usually tax deductible. Proceed with caution, however, as you are putting your most valued asset on the line to purchase a depreciating asset that can be stolen.

As cars have become more expensive, people have lengthened the terms of their loans. Where a three-year or four-year loan was most common years ago, today, the five-year loan has become the standard. While lengthening the loan results in a smaller monthly payment, it carries with it the potential for a financial risk -- being "upside down" in a car loan. That's the condition of owing more on the loan than the vehicle is worth. Because vehicles depreciate quickly, and because loans are longer today, unless you put a large down payment on the vehicle, you're likely to owe more than it's worth the minute you drive off the car lot.

That's not a problem if everything goes well, and you keep the car for a long time and make all your payments. But be aware of how badly and how long you'll be "upside down" if you want to avoid unpleasant financial surprises.