Whether you’re shopping around for competitive financing terms, securing your first loan or trying to build credit, understanding the basics of banking is essential. Use our dropdown menu of educational resources below to manage your finances with confidence.
The ability to borrow money is a necessity at one time or another in most of our lives. Credit is an indicator or measure of that ability. In order to be able to borrow money, and to borrow wisely, there are certain aspects of credit, and of having credit, that you should understand.
Lenders will help you determine how much you are able to borrow to purchase a car. This involves a review of your monthly expenses in relation to your income. This is referred to as pre-approval. It is a service usually provided for no fee, and you are not obliged to obtain your financing from that lender. If you qualify for a large amount of money for a car loan you should then consider whether you really "want" to commit to the correspondingly high monthly payments. As you increase your monthly financial obligations these will reduce your borrowing power for other purchases, your ability to save money, and what may remain for your discretionary spending.
Obtaining a loan to purchase a car is also referred to as automobile financing. Car loans may be used for new or used cars. Your car is the collateral for the loan, so the lender actually, at least partially, owns the car until the loan is paid in full. The title shows who owns the car and the lender will sign it over to you when the loan is paid off. If you do not fulfill the terms of the loan then the bank is able to repossess the car, sell it, and use the proceeds to apply to the loan balance. If those funds are insufficient to pay off the balance then you will owe that amount to get the lender. Loans for new cars are usually for 3-7 years, while used car loans are usually for shorter terms, 2-4 years.
The interest rates for car loans vary from lender to lender so be sure to shop around for the best deal before you commit to a lending agreement.
Car loans are commonly available from:
You should be aware that dealers are sometimes able to offer low loan rates (and/or lower lease rates) for particular models of cars. These special rates are most commonly promotions that are underwritten by the automobile manufacturer in order to assist in the sale of those models. It is also common that there are additional conditions required of you in order to qualify for these promotions. You may need to:
If you are unable to make your monthly payments on your home equity loan you could lose your home. Because of this risk you have a legal right as a borrower to completely reconsider your decision for up to three days after signing a home equity loan agreement. You have the right to cancel the loan without a penalty. This protective right applies when you use your primary home as collateral.
There are important differences between secured installment loans and rent-to-own services:
Installment loans charge interest and you are able to evaluate one to another by comparing APRs. Rent-to-own agreements are NOT loans, so no interest is charged, but other fees may be. Often by the time you own the item you will have paid much more than if you had originally purchased in cash.
There are differences between leasing and buying a car that may be important to you. One is not inherently better or worse than the other. The merits of one may match your particular needs better than the other. Consider the following:
Many people prefer the benefits of leasing. Many people prefer the benefits of installment loan financing. You must decide for yourself which option best serves your needs.
Expect lenders to review the three Cs to evaluate whether you qualify for a loan -- capacity, capital, and character.
Dealers are inclined to maximize the profit they receive from the sale of a car to you. Some dealers will try to add to their profit by providing you financing terms that are far worse for you (but good for them) than those that you could obtain yourself directly from a lending institution. If you apply for a loan at the dealership:
There are maintenance fees that many financial institutions charge for administrative activities such as reviewing loan applications and routine servicing of accounts. Many, if not most, credit unions waive some of these fees as a benefit of membership.
There are annual fees automatically charged by many credit card providers to keep those cards active, and to pay for the specific advantages linked with that particular card. There are sometimes fees for cash advances. There are almost always fees charged for exceeding your credit limit, as well as fees charged for credit card and loan payments that are late.
Rent-to-own agreements allow you to rent an item, usually from a retail store, until you pay enough to own it. The store actually owns the item until you make the final payment according to the agreement. If you miss a payment the store has the right to repossess the item. In that case you will lose the item and you will not receive any of the money back that you paid.
Rent-to-own arrangements are not loans. There is no interest charged. There usually is an additional amount of money above the cash purchase price that you will pay for the convenience of not paying for the item all at once. Renting-to-own is usually more expensive than taking out an installment loan. There is almost always a cost differential whenever you take advantage of the convenience of paying over time. To the lender the fee is compensation for the risks that they accept in the agreement.
If you are a home owner you may borrow money against its value. More precisely, you may borrow up to a percentage of the value that you actually own. The value that you actually own is referred to as your home equity. A loan against the equity that you have in your home is referred to as a home equity loan. Home equity loans may be used for any purpose. They are commonly used to consolidate other loans and to take advantage of lower interest rates. Many people use them as a source of money for making home improvements. Home equity loans are commonly used for funding education.
Home equity loans may take the form of a home equity line of credit. A line of credit is useful if you need to borrow sums of money at various intervals of time while you accrue interest only on the amount of the balance at any point in time. The maximum outstanding balance you may have distributed to you at any time with a home equity line of credit is usually a percentage of the amount of equity you have in your home as determined by an appraisal performed at the initiation of the agreement.
Common advantages of home equity loans:
An unsecured loan is one that is not guaranteed by putting your asset(s) at risk as collateral. Because this type of loan is inherently a greater lending risk the interest rates are usually higher than for secured loans.
Collateral is the asset that you put at risk or that the lender will become owner of if you default or fail to pay back the loan according to the terms of the lending agreement.
It is common that the car you are purchasing or the house you are buying with the loan will be identified in the agreement as the collateral. Sometimes you may use other assets as collateral if the lender agrees. The lender usually has the legal right to take ownership of the collateral if you fail to make payments on the loan consistent with the terms of the agreement.
Credit is the amount of money you are able to borrow -- usually to make purchases. A common way in which people are extended credit is via a loan. When you are loaned money you are agreeing to accept money from the lender and to pay that money back according to specific terms and with interest. The interest is the additional amount of money you agree to pay back to the lender as a fee for the convenience of using their money. This usable amount of money from the lender is referred to as the loan principal. Interest is the cost of borrowing money.
A borrowing or loan agreement is serious and binding. It is a legal document. If you adhere to the terms of paying back the loan then that positive behavior has a positive influence on your overall credit rating. If you are late in making payments or you stop making payments then your credit rating will suffer and you may run other risks as a result. Properly used credit can be a very good thing. Improperly used it can be a source of problems.
If you have good credit it means that you have a history of paying your debts and making regular payments on time. Having a good credit history makes it easier to borrow money. Having a poor credit history makes it more difficult to borrow money.
Interest is the amount of money paid to the lender for the convenience of using their money. Interest is the cost of credit. Interest rates may be variable or fixed: