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Auto Purchase:
Vehicle-Financing Costs
Auto Loan Basics
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Before you set foot in a dealer's showroom, learn all you can about an auto loan, leases, special financing and more. Vehicle-financing costs are the costs you incur when you buy an auto. If you buy an auto with cash, you don't pay any direct financing costs. However, the money that you take out of savings or an investment to pay for the auto has an opportunity cost.
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For example, if you take $20,000 out of an investment account that earns an average of 8% a year, the opportunity cost is almost $9,400 over five years. That's the interest your money would have otherwise earned had you left it alone. Opportunity cost is even greater if you raid a tax-deferred account.
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If you buy an auto, the major financing cost will be the interest expense and loan fees that you pay for the loan. (With a surge of zero-percent loan financing in the past few years, qualified consumers were able to obtain interest-free auto loans.) You also pay upfront costs to the lender when you close a loan. Keep in mind that sales tax, registration and other fees are added to the auto purchase price, boosting your financing costs.
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The capitalized cost reduction is synonymous with a down payment on an auto.
An auto loan is a great tool which when used effectively can give us the vehicle that we always dreamt about. Provided you have a good credit rating and a good source of income, you can buy any car that you dream of. But it is always recommended that you buy only a car which you can afford. There is a big mistake which people do when they plan about buying a car. They do not realize that apart from paying off the auto loan, there might be other expenses as well. Hence you must always have some amount of money in hand apart from the monthly payment for the loan.
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Factors Determining The Interest Rate
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There are many factors which should determine the interest rates. But in simple terms, anything that increases the risk in the transaction for the lender will increase the interest rate for you and vice a versa. So your aim should be to reduce the risk for the lender so that he in turn reduces the interest rate for you. Paying a huge part of the loan up front as down payment is a great way to reduce the risk for the lender and subsequently reduce the interest rates for you. It shows the lender that you have the ability to save up on money and hence creates a great impression about you.
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The Credit Rating
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The credit rating is often termed as the single most important factor determining your ability to apply for a loan. Yes, the credit rating is a very important fact. If you have a bad credit score, then most lenders won't even look at your application. It shows the lender that you are more likely to not pay the amount and default on the loan than make the payment on time. It is a clear indication of your payment behavior, your ability to handle finances.
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