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Are you looking to purchase a new car or even a used one and have zeroed in on your choices? Is the decision based on the pricing and the car financing options? Most often, it is. It is important that everyone understands what is involved in car financing and how it works. This can prove to be a major advantage while making the choices and also save hundreds or thousands of dollars

 

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Unless you know your basics, you can get carried away with the terminologies used. If you understand the stuff, you can ask the right questions and get the right answers. In order to make informed decisions, read on to understand how car financing works.

Know the basics

Simply put, car finance happens when you borrow money from a lender to buy a car, whether new or used one. The lender provides you the money based on certain criteria. Mostly, you pay back the principal amount borrowed from the lender along with an agreed interest percentage.

It is the interest amount that fetches the lenders their profit. Interest rates are calculated on a per annual basis and it would be an additional amount on the principal that is paid to the lender. There are options available online to calculate the interest rates for the car you have in mind. If you approach a lender, they can help you out with it as well. It is important to find the lowest possible rate of interest as even a minor change can work to a huge amount over the payback period of the loan.
 

Know your loan liabilities

While we feel that we have bought a car, in truth the car actually belongs to the lender and we are just using it. The car is owned by us only once we have fully paid the loan amount across the agreed period, known as the term of the loan. This also means that if you fail to repay the loan, the lenders can take possession of your car. 
It is necessary to take car insurance when you have financed a car loan. This is mostly to protect the interests of the lender. If your car meets with an accident or is destroyed, you will still be held liable to pay back the loan. And this is where the insurance comes in. You may have to pay out an agreed monthly instalment across a few years to pay back the loan.
 

Importance of credit score

The terms usually range from five to eight years depending on many factors. The interest rate you pay is decided, by your credit score among many other factors. It is the credit score that provides the lenders with an insight into your paying back capability and intentions. With a lower credit score, they are running a higher risk of not making the loan recovery. And they may compensate this with higher interest rates.

With all the above information, you may choose to find out options, ask questions and choose what is best for you.