An auto loan is a part of asset finance that allows a customer to borrow money to buy a personal, commercial, or business vehicle. If a person cannot raise the amount needed to purchase the vehicle in cash, he visits a financial institution to borrow money or a car dealership that can offer other options for owning a car.
The borrower enters a contract of an agreement with the financier. Part of this agreement will make the borrower a legal keeper of the car. As the legal keeper, he will receive all the legal documents that allow him to use the car.
The purchased vehicle will be the legal property of the bank or the financiers until the borrower completes paying the installments. The vehicle will be transferred to the borrower’s ownership after he finishes paying the auto loans and interest. The asset (vehicle bought) usually secures this loan.
Auto finance may be the easiest way of owning a car, but it comes with a few challenges depending on the financier. Today, we will see some challenges that a borrower goes through when choosing a financier.
Type of financiers
A car is not always a luxury, sometimes it is a necessity this is why getting a loan to finance buying a car is not wrong. There are several ways of owning a vehicle on borrowed money, you can borrow from bank, dealership and individual.
Borrowing from the bank is one of the accessible ways to go for. They are scattered in every major town. This means that the borrower is able to compare different rates and terms offered by different banks to come up with the best market deal.
The advantage of purchasing with the bank is they can customize payment options by extending the number of years of payment to suit your budget.
The biggest disadvantage is the transaction and other fees that a borrower will pay. Some of these costs are:
- Processing fees
- Valuation fees
- Credit life Insurance
- Car Insurance
- Tracking device
- Join registration of the car
Car dealership financing
The car dealership is giving convenience to buyers by offering them one-stop services e.g. Finance, insurance, evaluation, and others. Working with a dealership has its advantages because they usually have different financing options from different institutions.
The dealership submits the lender’s information and requests to the bank which leaves the buyer with the simple task of filling out the form for the loan approval. The dealership can also give car insurance on credit.
Dealerships offer trading in, which saves the borrower a lot of money when upgrading. Because a borrower can give up his old vehicle, apply for a small amount of loan and top up for a better car. By so doing, the buyer can get a sale tax credit, some discount, etc. Other advantages of a dealership are:
- Cashback, or a big saving for a cash buyer
- Lower interest on borrowing
- Trade-in assistance
Disadvantages of a dealership financier
This option appears to be the best option for borrowers. But that applies to the highest qualified buyer who has his credit report reading positively. A low credit report or unpleasant history of credit can disqualify a customer. Unlike the bank, which may use the current favorable financial circumstances to give a client a top-up or a new loan as long as he can demonstrate that his current ability to pay is ok.
Friend or Family member loan
You can approach a friend or family member for financing if they can afford to lend you. This option may, however, be a problem in case you cannot pay as promised.
A financial institution may deal with non-payment professionally, but a friend or a family member will be emotional about the finances they lend to you. Borrowing from a family or friend can jeopardize a great relationship.
How to avoid the Financial trap when taking a car loan
It’s worth mentioning that any dealership staff is in the selling business. Every vehicle has to sell. All the sellers have to get is your interest in the car to push you to buy. When visiting a car dealership, be careful that you may not drive out with a luxurious vehicle instead of the functioning one you originally wanted.
When planning to own a car, always shop around whether you are paying in cash or credit. Start by shopping for a vehicle that suits your current need and budget. Then, shop for money.
As you shop for money, put yourself first by deciding how much you can comfortably pay each month. You do not overburden yourself.
Also, don’t accept the first offer from a dealer or a bank. Different banks have different interest rates. Shopping around will also allow you to get the best deal.