How Do Car Loans Work?

A car financing is precisely what you think it is. It’s a kind of personal finance, the proceeds of which are used by the borrower to purchase a car. Typically, financial companies or institutions lend the cash to the borrower, so they can purchase the car. In return, the debtor agrees to pay back the financial company the amount of the loan in monthly installments together with interest, until the owed amount is fully paid off.

Unlike personal loans, cars loans are always secured as their collateral is the car itself. This means if the borrower fails to make his or her monthly payments, the lender reserves the right to repossess the car and sold it to clear the loan debt.

Basic Elements of a Car Loan

i. Total Loan Amount

The total loan amount includes the principal amount and the interest. The principal amount is the negotiated cost of the car itself. While the interest refers to the amount accrued over the lifespan of the loan based on the stated interest rate and the principal amount.

ii. Interest Rate

The interest rate is the amount that is charged by the lending agency or bank you choose to borrow money from to buy the new car. To be precise, it’s a percentage for a one-year period. This is why it is known as the annual percentage rate (APR).

iii. Down Payment

The down payment is an upfront cash paid by the debtor to the lender at the time of the purchase of the car. Typically, it is expressed as a percentage of the total price of the vehicle. Though it isn’t a legal requirement, lenders almost always demand it when you take out a vehicle loan.

iv. Terms & Conditions

Together all the items that make up a vehicle loan are expressed as terms and conditions. This includes the tenure of the loan (usually expressed in a number of months or years), registration and insurance requirements, maintenance requirements, loan payoff and resale terms, conditions pertaining an accident or theft, and conditions regarding loan default and repossession. You can find many other such conditions on the financing contract. It is advised that you should carefully read all of these terms and conditions in order to develop a clear understanding of what the lender means before signing the agreement.

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