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What Does Loan To Value Mean When Buying A Car


Comprehensive auto insurance is full coverage. It includes collision insurance but also covers every unexpected calamity that can destroy a car, from vandalism to a flood. But it pays the actual cash value of the car, not the price you paid for it or the amount you may still owe on the loan. Gap insurance covers the difference.




what does loan to value mean when buying a car



If time has passed since you got your original loan, your car has likely lost some of its value. Your LTV may be higher than when you bought the car if you owe more on your loan than the current car valuation.


GAP is an optional loan protection product that can be helpful should you be in an accident and have your vehicle declared a total loss. GAP does not take the place of primary insurance coverage for the vehicle.


If the vehicle being gifted to someone has a lien, the new owner will pay 6% sales tax on the loan balance prior to receiving a clear title for trade-in purposes. The title has to be in the same name as the vehicle being purchased in order to receive trade-in credit (i.e. brother gives his brother a vehicle, but the vehicle has a lien on it, the balance of the lien is $5,000.00). In order to get the title the dealer must pay the lien off. Once the dealer receives the title the original owner (brother) would then have to sign the title over to the new owner (brother). The brother who is buying a new vehicle must surrender the title and pay sales tax on 6% of the lien (6% of $6,000.00 = $360.00 sales tax) in order to get trade-in credit on the new vehicle being titled.


Gap insurance can come in handy when you buy a new car to cover the difference between its value and what you owe on the loan in the case of a total loss. If your lender requires it, check if you can get it from your insurance company before using the dealer.


Gap insurance does not cover theft. It only pays when your vehicle is totaled and you owe money on the loan. However, comprehensive insurance does cover theft, and lenders require comprehensive coverage on cars with auto loans.


But many Americans make big mistakes buying cars. Take new car purchases with a trade-in. A third of buyers roll over an average of $5,000 in debt from their last car into their new loan. They're paying for a car they don't drive anymore. Ouch! That is not a winning personal finance strategy.


"The single best advice I can give to people is to get preapproved for a car loan from your bank, a credit union or an online lender," says Philip Reed. He's an automotive expert who writes a column for the personal finance site NerdWallet. He also worked undercover at an auto dealership to learn the secrets of the business when he worked for the car-buying site Edmunds.com. So Reed is going to pull back the curtain on the car-buying game.


"The preapproval will act as a bargaining chip," he says. "If you're preapproved at 4.5%, the dealer says, 'Hey, you know, I can get you 3.5. Would you be interested?' And it's a good idea to take it, but make sure all of the terms and conditions, meaning the down payment and the length of the loan, remain the same."


A third of new car loans are now longer than six years. And that's "a really dangerous trend," says Reed. We have a whole story about why that's the case. In short, a seven-year loan will mean lower monthly payments than a five-year loan. But it will also mean paying a lot more money in interest.


Seven-year car loans are financially dangerous because cars depreciate in value the moment you drive off the lot. "You're waging this battle against depreciation because basically you're paying off a loan while the car drops in value," says Reed.


A lot of people could apparently use this advice. According to industry data, 32% of new car buyers with a trade-in are rolling over about $5,000 in negative equity into their next loan when they buy a new car.


First, be clear on what you can afford. Look at your budget to see what monthly payment you can handle, bearing in mind any changes you may have in insurance, maintenance, and fuel costs. Plug your ideal monthly payment into an online car-buying calculator to find out how much of a car you can afford, taking projected trade-in value, or down-payment money into account.


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The most common scenario where it might be necessary to deposit additional funds to meet margin requirements is one where your securities decline in value, but it's not the only scenario. When using margin loans, you should always be aware of the following:


While margin can provide flexibility by not locking you into a fixed monthly principal repayment plan, it's important to understand the amount available to borrow is dependent on the type and value of your eligible securities, which may fluctuate over time. And of course, even without scheduled principal repayments there will still be interest assessed on the loan, so you'll need to be sure that you have sufficient funds available to cover this interest expense. Find out more about eligibility


Once you've borrowed on margin, you'll need to keep an eye on what is called your account's level of equity. The equity of a margin account is equal (in simple cases) to the account's total value minus the outstanding margin loan, and this equity must be kept at or above a margin maintenance level. Typically, the margin maintenance level is 30% of the total account balance, but it may be higher, depending on the type of securities held in the account and other factors.


In any case, this means that using margin loans creates a risk that you will be required to deposit additional funds to your account, or else be subject to an involuntary liquidation of the securities held in your account in order to pay off the margin loan. The requirement to deposit additional funds, when your equity falls below the minimum requirement, is known as a margin call. You can read more on these requirements.


Most people turn to auto loans during a vehicle purchase. They work as any generic, secured loan from a financial institution does with a typical term of 36, 60, 72, or 84 months in the U.S. Each month, repayment of principal and interest must be made from borrowers to auto loan lenders. Money borrowed from a lender that isn't paid back can result in the car being legally repossessed.


Generally, there are two main financing options available when it comes to auto loans: direct lending or dealership financing. The former comes in the form of a typical loan originating from a bank, credit union, or financial institution. Once a contract has been entered with a car dealer to buy a vehicle, the loan is used from the direct lender to pay for the new car. Dealership financing is somewhat similar except that the auto loan, and thus paperwork, is initiated and completed through the dealership instead. Auto loans via dealers are usually serviced by captive lenders that are often associated with each car make. The contract is retained by the dealer but is often sold to a bank, or other financial institution called an assignee that ultimately services the loan.


Direct lending provides more leverage for buyers to walk into a car dealer with most of the financing done on their terms, as it places further stress on the car dealer to compete with a better rate. Getting pre-approved doesn't tie car buyers down to any one dealership, and their propensity to simply walk away is much higher. With dealer financing, the potential car buyer has fewer choices when it comes to interest rate shopping, though it's there for convenience for anyone who doesn't want to spend time shopping or cannot get an auto loan through direct lending.


Probably the most important strategy to get a great auto loan is to be well-prepared. This means determining what is affordable before heading to a dealership first. Knowing what kind of vehicle is desired will make it easier to research and find the best deals to suit your individual needs. Once a particular make and model is chosen, it is generally useful to have some typical going rates in mind to enable effective negotiations with a car salesman. This includes talking to more than one lender and getting quotes from several different places. Car dealers, like many businesses, want to make as much money as possible from a sale, but often, given enough negotiation, are willing to sell a car for significantly less than the price they initially offer. Getting a preapproval for an auto loan through direct lending can aid negotiations.


Although the allure of a new car can be strong, buying a pre-owned car even if only a few years removed from new can usually result in significant savings; new cars depreciate as soon as they are driven off the lot, sometimes by more than 10% of their values; this is called off-the-lot depreciation, and is an alternative option for prospective car buyers to consider.


There are a lot of benefits to paying with cash for a car purchase, but that doesn't mean everyone should do it. Situations exist where financing with an auto loan can make more sense to a car buyer, even if they have enough saved funds to purchase the car in a single payment. For example, if a very low interest rate auto loan is offered on a car purchase and there exist other opportunities to make greater investments with the funds, it might be more worthwhile to invest the money instead to receive a higher return. Also, a car buyer striving to achieve a higher credit score can choose the financing option, and never miss a single monthly payment on their new car in order to build their scores, which aid other areas of personal finance. It is up to each individual to determine which the right decision is. 041b061a72


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