Auto Loan Finance

When you make the decision to get auto loan finance, you will be faced with choices about which type of loan to take. Here are a few loan types and what they are to help you make a more informed decision.

These are the most ideal types of loans to look for. With a simple interest loan your interest payments are calculated daily based on the amount of the loan left to pay. This means more of your payment goes towards the principle amount of the loan and not all towards the interest. As you make your monthly payments, the principle amount decreases, and this will eventually decrease the amount of interest you pay. While most lenders will use this type of loan, not all do. So be aware of this when you decide on your car finance lender.

These are much less common these days, but are still out there. You really need to keep your eyes open and steer clear of these types of loans. During the 1920's a calculation was formed to be a simple way for a lender to determine the overall interest amount of a loan. The total amount of interest was calculated in to the loan, then divided over the number of months you pay on the loan. Basically, the interest is "added" in to the loan. The 78 got its name because of the number of digits in the formula. With an add-on loan all of the interested in calculated at the beginning of the loan, and you are held responsible for the entire amount of interest that is pre-set. The problem with this type of calculation is that it assumes that more of your payment is applied to the interest, and doesn't take in to account the amount you have paid towards the actual money borrowed. For instance, if you have a car loan for $20,000 and a term of 5 years, with an add-on loan you would be looking at monthly payments around $630 and life time interest charges of almost $18,000. A simple interest loan would give you a monthly obligation of around $500 and less than $11,000 in lifetime interest. That's a huge difference!

Many states have outlawed Rule of 78's loans, but some still allow it.

Another option that a lot of people choose when it comes to auto loan finance is to put the loan on a credit card. This can have advantages and disadvantages. If you're looking at purchasing a used car for a lesser amount, then this may not be a bad idea. If you have a card with a great interest rate, or an introductory rate and you know you can pay the car off before it expires, then by all means look in to it. With credit cards though, if you are late on a payment, or miss a payment, your interest rate can skyrocket and leave you stuck holding the bill for much higher interest payments. Using a card for a new car loan is usually not feasible for most people.

Be sure you understand the types of loans being offered before you sign anything. Know what you can afford, and understand the fine print. As long as you are smart about it, you can find a finance option that works for you.