August 18, 2005
Auto Loans
Auto Car Loans
In order to get a new car loan you should know small variations which can cost you a lot of money. So, check any auto loan offer, including the small print, for details.
Approximately 90% of all auto loan offers in the US are based on simple interest. A simple interest loan is the interest that is computed only on the original principal of the loan. You should never accept an auto loan that is not a simple interest loan.
One more thing to keep in mind when considering an auto loan is pre-payment penalties. If you find such a penalty in your auto loan contract, the lender is going to penalize you, by charging a fee, if you pay the loan off early. So, if you think that you will refinance your auto loan at some time, this is obviously a significant consideration.
Stay away from pre-computed auto loans
There are lenders who offer auto loans that are not simple interest loans at all, but pre-computed loans. These loans are usually “sold” by smaller lenders and car dealers. Watch out for these auto loan deals for the following reasons:
1. If you sign this type of auto loan, you are legally committed to paying back the complete principal balance of the loan plus the total amount of all interest that would accumulate over the life of the loan.
2. If you say yes to such a pre-computed auto loan, and then wish to pay it off early, the lender will typically use an outdated and expensive formula, known as the rule of 78s’, to calculate a rebate of finance charges. Through this rebate you will pay an extremely heavy fee for paying the loan off early.