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Understanding Interest On Car Loans

Author: Charles Martin  //  Category: Car Insurance

It is the risk factor involved that determines the rate of interest on a car loan. The lender lends money to the borrower to buy the car at a specific rate of interest. If the risk is more the interest rate is higher and vice versa. When the car itself is used as collateral it is possible to get a secured car loan.

Secured Loans by Using Collateral

Collateral is taken so that the lender feels secured in case the borrower defaults in making the loan payment. In case the loan is not repaid on time the lender is able to sell the vehicle and have the invested money recovered. In this way the lender does not face any kind of loss. The rate of interest charged on the car loan is higher only in cases where the risk is higher.

It is important for the borrower to also know how the lender looks at him at the time of offering the loan. When this is done it is possible to look at the terms offered on the loan properly. Most of the lenders are interested in the FICO scoring. If the score is higher, then the interest rate you will pay will be higher. The credit history, the method of paying off previous debts is known by having a look at the credit report of the borrower.

Get Identified As a Responsible Borrower

A lowered interest is offered if you are identified as a responsible person paying of the credit card payments, car loans and personal loans. Lenders face lesser risk when the borrower has a good credit status. Cleaning up the credit report becomes essential in case the borrower’s credit score is less than perfect.

Before seeking an auto loan it is best to review the credit score and see if it is good enough to get a loan. The age of the vehicle is the other risk factor that affects the lender. Loans can be outlived better when a new car is purchased. Resale value of a new car is always higher as compared to an older version.

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