Getting around the metro can be a breeze with public transportation widely available but poses a problem for those who are living in the suburbs where traveling time can take about two to three hours of commute every day. With that said, getting your own private vehicle is logical however, for most of us average Joes, buying a car can be impossible for at least 2 -3 years of working hard and can put a dent in the household budget for those who already have families.

The concept of auto loans or car loans therefore comes across as an excellent idea because not only will one be able to purchase a car, they can pay the cost on a staggered basis thus still allowing them to pay their other obligations as well. If you are like most people, you are pretty much clueless about how it goes and this article can help you learn about the types of car loans, how to finance it and how to get the best possible deal.

Car Financing

Basically a car financing or auto loan works just like any other loan types. A person borrows from an institution or a private loan company to pay for the item borrowed. The borrower promises to pay his loan in installment basis depending on the agreed terms and conditions between parties. The loan amount includes an interest rate which the borrower must pay together with the original amount.

Interest rates vary but most loan institutions follow several factors to determine the loan value that a borrower can loan. Credit history of the borrower is important as it provides lenders with information on how good the borrower is in paying his or her obligations and if they do not default on it. The next would be the interest rate to be applied which can be a simple interest or one that is compounded.

Simple interest rate works by using (Principal amount x Int. rate = total loan amount). A compound type on the other hand works by ((Principal amount + interest rate) x interest = total payment). Last but not the least, lenders do also check the debt-to-income ratio that the borrower has to determine how many percent of the borrower’s income goes to paying their bills.

A car loan type also varies: (a) personal loan, (b) hire/purchase, (c) re-mortgage, (d) interest free and (e) personal contract. To learn more about these options, it is best to talk with a loan institution as one would be able to determine the pros and cons of each loan type and what would work best for you.

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