Automobile Loans

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What is a “no credit check" or “buy here, pay here” auto loan?

A “no credit check” or “buy here, pay here”auto loan is offered by dealerships that typically finance auto loans “in-house” to borrowers with no credit or poor credit. You may see signs like “no credit – no problem” or “military E-1 and up.” The interest rate on loans from these dealerships can be much higher than loans from a bank, credit union, or other lender.

Normally, a bank, credit union, or other lender will limit the amount it will lend for the purchase of a vehicle based on the vehicle’s value. Those lenders will not loan more than the value because the vehicle in question simply isn’t worth it. But when a dealer acts as its own “bank,” it may not set such limits. So you may end up paying thousands of dollars more than the actual value. In other words, with “buy here, pay here,” there is a bigger risk that you will borrow to pay more than the vehicle is worth.

Don’t be fooled into thinking that you have no choice. Even if you have poor or no credit, there may be other lenders that are willing to finance your vehicle purchase. Knowing your options for financing before you start negotiating to buy a vehicle can help you get the best overall deal.

What is the difference between paying interest and paying off my principal in an auto loan?

Principal is the money that you originally agreed to pay back.

Interest is the cost of borrowing the principal. Generally, any payment made on an auto loan will be applied first to any fees that are due (for example, late fees). Next, remaining money from your payment will be applied to any interest due, including past due interest, if applicable. Then the rest of your payment will be applied to the principal balance of your loan.

Contact your lender or loan servicer and ask questions if you want to know more about how your lender applies your payments. If you plan to pay more than your monthly payment amount, you can request that the lender or servicer apply the additional amount immediately to the loan principal. You should confirm that your payment was applied by reviewing your loan balance. However, the lender or servicer may refuse to apply the additional payment if your loan has a precomputed finance charge.

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