An auto loan is an extension of credit designed to fund the purchase of an automobile. The lender loans you money at the time of purchase, and you agree to repay the loan by making monthly payments for a number of years. The lender charges you interest for the loan, and retains a lien on the automobile to secure repayment. In most states, the lender will keep the car's certificate of title until you repay the loan. If you fail to make payments on the loan, the lender can repossess the car and resell it to pay off the loan balance.
Generally, you must make a down payment at the time of purchase. Typically, you make the down payment in cash or by trading in another car or both. The difference between your down payment and the total price of the car, including tax and applicable charges, is the amount of money you need to borrow (loan amount). New car loans typically have repayment terms of 36 to 72 months. Used car loans generally have a somewhat shorter repayment period.
If you are buying a new automobile, your lender will probably require you to make a down payment that is equivalent to a percentage of the purchase price. This is typically between 5 and 20 percent. A trade-in allowance is offered for your old car and can offset the amount required for a down payment.
If you are buying a used car, the lender will typically agree to lend you 80 to 100 percent of the car's loan value. The loan value is a number that lets a lender know, on average, how much credit to extend for a particular car without incurring excessive risk. The loan value of a used car can be found in any of several weekly or monthly publications that are marketed to car dealers and bankers. The information may also be available from your auto insurer. (Depending on where you live, and to whom you are talking, these books are called Blue Books, Black Books, used car guides, or the N.A.D.A. guide. You can probably find such publications in your local library. Ask for a guide to used car values.)
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