A car loan helps you finance the purchase of a car. After all, most people do not have enough cash on hand to pay for a car in full. Lenders such as a bank or the car dealership you purchase from will provide you with money to buy a car. You will make payments each month to repay your loan over a period of time. Your car loan’s interest rate and other loan terms will depend on different factors, including your credit history and income.
Car loans are a type of secured loan: The vehicle you purchase serves as your loan’s collateral. Lenders can thus repossess your car if you fail to make payments on time. Before you buy a car, make sure you can afford the payments each month.
Car loans typically have terms of 2-7 years. Longer loans may have lower payments each month compared to shorter-term loans. However, for the longer-term loan, you may end up paying more in interest.
Typically, the monthly payments of an auto loan are fixed for the lifetime of the loan. Lenders apply some part of every payment towards the interest and another part to reduce the principal balance of the loan.
Before you apply for a car loan, be sure to check your credit report and your credit score.
Pros: A car loan will help you acquire a vehicle and can increase your credit score if you make payments on time.
Cons: Your car can be repossessed if you miss a few payments, with all your previous payments deemed non-refundable.