Do you wish to buy a car? Here is everything you need to know – what is a car loan and how does it work?
If you’re one one those individuals who wish to buy a new or even a used car but you don’t have enough money to pay for one outright, then you’re not alone. There are a lot of individuals out there trying to find their way into the world of most classic cars, yet, their budget does not allow them to act on their dreams. Nonetheless, don’t worry. A car loan is here to save you. The world of cars can be a little too overwhelming for you if you’re an amateur, however, here’s everything you need to learn about the basics of a car loan and how it works.
What is a Car Loan?
A car is pretty much similar to a personal loan; that allows you to pay off the price of the car in a number of monthly or yearly payments. It means that the lender – bank or financial institution – pays off for the car, and you’re required to repay the money back to the lender with interest. Once you’re done paying the installment, you’ll be the sole and official owner of the car.
How does a Car Loan works?
Since, the world of car financing is a little too complicated for beginners, the question “How does a car loan works?” is critical to understand the basics of a car loan.
Simply, a car loan works by signing a contract with the lender – a bank or financial institution. The contract states the lender pays off the cost of your vehicle while you’re required to pay the money back with interest in a number of installments over a pre-set period of time.
The terms of the contract may include:
- Finance charge
- Loan duration
- Amount of monthly installments
The loan may be a secure or an unsecured loan depending upon your lender and the situation you’re presented with. However, mostly, lenders prefer you to offer a collateral against the loan so that in case you’re unable to repay the loan, your asset can be sold in the place of your installments. In other cases, the vehicle itself is used as a collateral.
Now, you must consider following important things while applying for a car loan:
- Be aware of what you can afford
- Determine your credit history
- Look around for the most suitable loan
- Set limits while getting approved for the loan
- Shop for an affordable car
What are the types of Car Loans?
There are various type of car loans available out there depending upon the type of car, type of loan, amount of money and so on. We’ve described the most common car loans for you to pick the best one for yourself.
Type 1: New car loans
As the name suggests, new car loans are available only for brand new cars. however, depending upon the lenders, these loans may be available for cars that are 2 to 3 years old, and not more than that. You must already have an idea that new car costs more, therefore, you’ll face more competitive interest rates.
Type 2: Old car loans
These loans are available for cars that are more than 2 to 3 years old, or the age of the car may differ depending upon the conditions of your lender.
Type 3: Secured car loans
Secured car loans utilize the car in question as a collateral against the loan, so that in case you’re unable to pay the loan, your car can be sold to pay the money back to the lender. These loans are specifically available for new cars.
Type 4: Unsecured car loans
Unsecured car loans do not require a collateral against the loan. However, they require a solid credit history. This is why these loans are a little complicated to borrow.
Type 5: Fixed rate car loans
The rate of interest on these loans remain constant throughout the years.
Type 6: Variable rate car loans
The rate of interest on these loans fluctuate throughout the years depending upon the conditions of the lender.
An Overview of Best Car Loan Lenders
Here’s your guide to select the best lender to borrow a car loan.
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