Car Loan

The most common method of buying a car is borrowing the money and then paying it off in installments. Over 85% of new cars and half of used cars are financed

There are two primary methods of borrowing money to buy a car: direct and indirect. A direct loan is one that the borrower arranges with a lender directly. Indirect financing is arranged by the car dealership where the car is purchased. Legally, an indirect “loan” isn’t technically a loan; when a car buyer obtains financing facilitated by a dealership, the buyer and dealer sign a Retail Installment Sales Contract rather than a loan agreement. The dealer then typically sells or assigns that contract to a bank, credit union, or other financial institution. Usually, the dealer knows in advance which financial institution will buy the contract. The borrower then pays off the financial institution the same as for a direct loan.

Typically, the indirect auto lender will set an interest rate, known as the “buy rate.” The auto dealer then adds a markup to that rate, and presents the result to the customer as the “contract rate.These markups have been the focus of some regulatory scrutiny because they can cause variations in interest rates that are not correlated with credit risk.

Roughly half of new cars in the U.S. are financed by the captive financing arms of car manufacturers, such as the Ford Motor Credit Company.Captives have a smaller share of the overall car financing market (new and used cars), along with banks, credit unions, and finance companies. A small number of cars are financed directly by the dealership at “Buy Here Pay Here” dealers, which cater to customers with subprime credit. Buy Here Pay Here financing accounts for 6% of the total financing market.

Car financing options in the United Kingdom similarly include car loans, hire purchase, personal contract hires (car leasing) and Personal Contract Purchases.

Source: Wikipedia


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