An automobile loan is a form of installment credit that has a fixed number of payments. The number of payments is expressed in months and is referred to as the “term” of the loan.
A number of different types of lending institutions offer an automobile loan. These include banks, credit unions, captive finance companies (such as Ford Motor Credit and Nissan Motors Acceptance Corporation), financial services companies (such as AmeriCredit) and savings banks. While all these institutions originate car loans, the focus of these lenders is very different.
The primary focus of a bank is to lend money to small, medium and large businesses. An automobile loan is usually a secondary business. Because of this, banks tend to lend only to the most credit-worthy customers. Their rates are fairly competitive and while loan terms tend to be generous, they don’t attract a broad spectrum of consumers.
Credit unions specialize in consumer loans. Because they are not-for-profit businesses, their rates are usually lower than most banks. Credit unions are owned and controlled by their members and can be community-based, offering loans to residents of a specific area, or employment-based, offering loans to a specific group of people (such as government employees). Credit unions can offer an automobile loan to a broader credit spectrum. Because loans are made to members of the credit union, loan terms and interest rates are, for a given credit score, more liberal than those of banks.
Captive finance companies are the financial services arm of automobile companies. Their business activities are primarily in the area of automobile loans in support of their parent companies. As such, they are able to offer subvented (supported) loans at, in many instances, below-market interest rates of select models to support the auto company’s marketing campaigns. While these special rates are usually offered only to the most financially qualified customers (those with the highest credit ratings), getting an auto loan of this type can result in the savings of thousands of dollars in interest expense over the life of the loan.
Financial service companies usually offer auto loans to the broadest spectrum of customers – including those with severely damaged credit. Because of this, down payment requirements for an automobile loan can be much higher – from 20% to 50%, and interest rates can top out at state usury limits – sometimes ranging from as low as 5% to 26%.
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