Auto loan calculation
Auto credit falls into the category of consumer credit. As such, a credit organization or a bank lends a sum of money to the borrower in order to finance his purchase of a car (new or used). In order to finance this purchase, the borrower can choose the personal loan or the affected auto loan .
The borrower may be forced to resort to a specific type of credit. Indeed, if he wishes to buy a used car, he will have to orient himself towards the personal auto loan. He can make his request to a bank or a credit institution. As part of a purchase of a new vehicle, he can choose the affected car loan. This credit has the advantage of being directly suspended upon delivery of the purchased car. The repayment of the monthly payments will not begin until after delivery. Conversely, if the buyer does not take delivery of the car, or if the car is unsuitable, the funds will not be delivered.
Credit institutions, banks or organizations present on the Internet are free to set the interest rate they wish, the aim being to remain competitive while being remunerated.
Obviously, the calculation of a loan (whether consumer or real estate) depends on several criteria. The larger the amount borrowed and the length of the loan period, the higher the cost of credit will be. The cost of a loan is reflected through the interest rate applied. The interest rate and the remuneration that the lender will withdraw from the situation. Credit institutions get paid at this rate. The interest on each loan constitutes their income. This rate is calculated according to the duration of the loan, the nature of the risks incurred (purchase of a new vehicle, a used vehicle, work loan, etc.) and the guarantees provided by the borrower (situation personal and professional). This rate will correspond to the interest that the borrower will have to pay in addition to his various monthly repayment installments.
Thus, the longer the term, the higher the rate applied. This is explained by the fact that the risk incurred by the banking establishment is much greater when the duration of the loan is long. Indeed, the borrower may be subject to certain vagaries of life which will force him to not be able to repay all or part of his monthly payments. An additional dependent child, divorce, job loss, death (etc.) can have the consequences of reducing the disposable income of the borrower. The disposable income of the household is no longer sufficient to allow the borrower to honor his commitments and repay his monthly payments. Logically, these events are much more likely to occur if the period between the lender and the borrower is long. It is therefore understandable that these lenders increase the interest rate (their remuneration) according to the duration of the loan in order to guard against its risks.
Depending on the nature of the risks, the borrowing rate may vary. Indeed, some financing needs are more risky than others. The personal loan is riskier than the affected loan. The latter is granted for a purchase, most often of a consumer good such as a new vehicle, very precise. The bank (or the institution delivering the goods) therefore has very precise knowledge of the nature of the risk. It does not commit to a vague or unknown risk. For example, when the borrower applies for a loan to finance work, the interest rate will be very high. Indeed, this is a fairly vague risk that can give rise to complex situations when there are delays or unforeseen events in the work, when deadlines are lengthening etc. The borrower may find himself in a situation where he will have to repay his monthly payments while his work will not be finished and he will still need cash. This situation is not favorable for credit institutions. To cover themselves and keep remuneration, they apply rates almost twice as high as those applied in the context of a personal auto loan.
In the same logic, a personal loan for the purchase of a new vehicle will cost less than a loan for the purchase of a used vehicle. The risk is less important on a new vehicle than on a used vehicle. The buyer of a used good is much more likely to incur costs as a result of his purchase than a buyer of a new good. In the case of the purchase of a used vehicle, it may involve repairs not provided for in the months following its purchase. In these situations, it is very rare that the purchaser can call upon any guarantee allowing him not to pay his expenses. While a new vehicle is often guaranteed by the manufacturer for several years, which reduces the financial risk to which the borrower and therefore the lender is exposed. The cost of an auto loan for the purchase of a new vehicle is therefore lower than the cost of an auto loan for the purchase of a used vehicle.
When an individual chooses to use a loan to finance a purchase (of a vehicle or otherwise), the cost of credit should not be the only element to be calculated before making the decision to apply. In addition to the calculation of the loan, the borrower must be interested in his debt ratio. This is the ratio between the various debts weighing on the borrower and the monthly net income of the latter. Generally speaking, this ratio must be less than 33%. Thus, a household should not use more than 33% of its net disposable income for the settlement of its debts. Beyond this rate, the household is considered over-indebted.
This ratio should however be put into perspective. It is important to take into account the nominal values of net disposable income as well as debt. The 33% will weigh less on the finances of a wealthy household with a comfortable income than on a household with low income. Loan applications are sometimes accepted automatically without a personalized study of the file. If the debt ratio is less than 33%, the file could be accepted even though the “ remainder to live ” is low and would not allow the household to face all the financial situations it would have to face. This rate should preferably also be calculated by the borrower himself. Before any loan request, the borrower should know what his debt ratio is in order to anticipate and himself to know if his situation allows him to finance himself through this. Different websites offer individuals to calculate this rate by entering various predefined elements.
For households with low incomes, it is preferable to turn to the banks for personalized support. Obtaining the loan might be more difficult to have, but the risk of debt distress is a very significant risk faced by many households. At the same time as the development of credit establishments on the Internet, the number of over-indebted households continues to increase. Since 1990, the number of over-indebtedness files filed has grown by 140%. The amount of debt of these households now averages $ 41,254, with a total of 9 cumulative debts (including mortgage loans). It would therefore be appropriate to strengthen the subscription rules and limit the obtaining of consumer credit to households that could not face these financial risks. Thus, a low-income household could be refused a loan even though this rate of 33% has not been reached.
When the borrower decides to finance himself through consumer credit, especially the auto loan, it is important to calculate the cost of credit as well as its debt ratio. He can do several simulations in order to find the most advantageous credit that best meets his needs. However, he will not be able to do several calculations to determine his debt ratio. Depending on this last element, he may apply for an adapted credit. He may need to lower his ambitions and ask to borrow a smaller amount. It will also cost him less to take out a loan over a shorter period. However, his situation must allow him to do so insofar as the monthly payments will therefore be higher.
Finally, in order to be prepared for all financial circumstances preventing him from repaying all or part of his credit, the borrower is recommended to take out loan insurance. Unlike a mortgage, insurance is not mandatory when applying for a consumer loan. Although this optional insurance has a cost and has an impact on the calculation of the credit, it allows the borrower to guarantee this against risks such as job loss, disability or even death. It is important to know that despite the occurrence of these situations, the monthly payments are still due by the borrower or his beneficiaries. If there is subscription to this insurance, it replaces the borrower in order to regularize the missing monthly payments. This insurance is offered automatically by credit institutions when applying for consumer loans such as car loans.