While wealthy car buyers may have the luxury of paying for a new car out of pocket, the average person isn’t so fortunate. For most people, the only way to finance a new car is through a car loan – a complex financial instrument that requires much planning and forethought before buying the new car.
The Car Loan Defined
At its most basic definition, a car loan is a personal loan used to finance an auto. It is a secured loan in that the auto is used as collateral for the loan. The car loan can take the form of either an indirect or a direct loan depending on how the car buyer chooses to enter into the loan agreement.
An indirect car loan means that the car dealership acts as an intermediary between the bank and the car buyer. A direct car loan means that a bank loans money directly to the car buyer outside the purview of the car dealership.
In short, the car buyer is free to obtain an auto loan from any lending institution that offers the most competitive deal in terms of financing, interest rates, and loan terms.
While the car dealership benefits financially from an indirect car loan when making the new car purchase at the dealership, the choice is ultimately left to the car buyer.
Car Loan Amortization: Paying off the Auto Loan over Time
For mortgages and auto loans alike, amortization is a financial term used to describe the elimination of a debt over time.
In the case of an car loan, amortization occurs when the car buyer makes monthly payments to his or her lending institution with the intent of zero amortization at the end of the specified auto loan time period.
In the beginning, the car buyer will pay off mainly the interest on the car loan. But as time progresses, the car buyer will increasingly pay down the principal until the entire auto loan amount is paid off.
Numerous factors go into auto loan amortization including interest rate, loan amount, and length of the car loan. Car buyers are encouraged to search the web for amortization calculators to estimate what price they are able to pay monthly for a new car.
