Car Loans – All You Need to Know

Not all of us have enough savings stashed away to buy a car outright. Most of us will need to take a car loan when buying a new set of wheels. If you are not sure of what the car loan application process entails, here’s a quick guide.

What Is a Car Loan?

Unlike personal loans that are unsecured, a car loan is a secured loan – the loan is secured against the car you intend to purchase. This means if you default on your auto loan payments, the lender can seize your car. Once you get the loan, you’ll need to pay for it in fixed installments over the course of the loan repayment term. Once the car is paid off, you have full ownership of the vehicle.

The Pros and Cons of Car Loans

Pros

The fixed monthly payments will help you plan your budget.

You can decide the loan term. While the standard car loan term is 5 years, you can opt for a term that’s shorter or longer.

Car loans usually have better interest rates in comparison to credit cards.

Cons

You won’t get a great interest rate unless you have a good credit score.

The value of the car depreciates over time, so by the time your loan term comes to an end, your car will likely be worth significantly less than what you paid when buying it.

If you miss a monthly payment, your credit score will be negatively affected.

What You Need to Consider when Taking a Car Loan

It’s important to consider how much you can actually afford to borrow and pay back month after month. It may seem tempting to get a big loan and buy a swanky new car, but if you are unable to make the payments, your credit score will suffer and you will find it a lot harder to get a loan or credit card of your choice in the future.

Before you get a car loan, ensure you compare loans offered by different banks and credit unions. Get the loan that has the lowest interest rate and charges.