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When vehicles cost a few hundred (or even a few thousand) dollars, people would save up to buy one. Once new cars began to cost more than a first house, however, car loans became a necessity. Today, most people who buy cars finance at least part of the purchase by borrowing money from a bank or from the automobile company from whom they purchase their vehicle. Auto loans are "secured" loans as they are guaranteed by property (a vehicle) that may be taken by the lender if the borrower fails to pay, or "defaults," on the loan. State banking laws regulate how many payments must be missed before the borrower is considered to be in default. Most banks will attempt to renegotiate the loan or make adjustments to the loan rather than take the car that the company then must sell to recover its money.
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"Interest" is the amount of money paid by the borrower to use the borrower's money (or "principal"). It is charged to the borrower each month on the unpaid balance. Any lender will want complete details of the vehicle to be financed (make, model, year and Vehicle Identification Number) before proceeding with an application and will compare the offer to the "Blue Book" value or the NADA (National Auto Dealers Association) value. It's always best to find an auto that you can put at least 10 percent of the purchase price down on before beginning to look for a loan because, once value is confirmed, the lender will offer the borrower a loan of principal at a rate determined by the percentage of the purchase price to be borrowed and credit history of the borrower. Banks have traditionally offered better interest rates than auto manufacturers but this may not always be true if the dealer has "incentive" deals authorized by the manufacturer; so the smart borrower checks with several lenders before accepting a loan contract.
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The lender and borrower will "close" a loan deal by signing a contract that discloses all of the costs of the loan, including interest rates, taxes and title costs. The borrower has a certain number of business days, set by law (usually three), during which he may choose to stop the loan. At the end of that period, he can pick up his check for the agreed-upon principal, combine it with his down payment and complete the sale with the car dealer. At this point, the lender owns a percentage of the vehicle and the borrower generally must list the lender as having a "lien" or claim on the vehicle on the vehicle title. Some loan agreements allow the lender to make extra payments or pay ahead so that he can skip some month and if the borrower wants to pay off the loan, the lender should offer a "payout" that saves the lender some interest payments. However the loan is paid off, the lender should send the borrower a "release of lien" document discharging any further claim on the vehicle.
