How Does a Used Car Loan Work?
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Book Value Is Established
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When an individual finds a used car and approaches a financial institution asking to borrow the money to buy it, the value of the car will be determined. The financial institution will use The Kelley Blue Book or the NADA Guide to determine the loan value of the car before making a loan offer. Banks are not usually willing to loan an individual more for a car than the car's loan value. Therefore, if the asking price happens to be more than the loan value, the individual may need to pay cash to the seller for the difference, or find a different car. After establishing the amount the bank is willing to loan for the used car, the borrower can begin working out the other details of the loan.
Loan Application
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The potential borrower will fill out a loan application indicating the amount requested for the used car loan. The financial institution will require proof of identification, of monthly income, and of full-coverage car insurance and run a credit history or report. The potential used car buyer will request the number of monthly payments desired on the loan application. Used car loans are typically 36 to 60 months. The longer the term of the loan the lower the monthly payment will be. This helps the car payment to fit into the borrower's monthly budget. Keep in mind that when the term of the used car loan increases so does the interest rate.
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Loan Is Finalized
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Once the used car loan application is approved, the bank will write a check out to the car dealership or individual selling the used car. Sometimes the check will be made out to two parties, the seller and the car buyer. When that happens the buyer will need to sign off the back of the check and give it to the seller. When the buyer applies for the transfer of the car title, the financial institution's name and address will need to be placed on the title under secured interest. When the new title is received, the financial institution requires a copy to prove the buyer's name is listed on the title. By listing a secured interest, the title cannot be transferred to another person without a release of lien. This protects the financial institution's interest in the vehicle. When the borrower pays the used car loan in full, a release of lien is received and can be attached to the title.
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- Photo Credit Julia Fuller
