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What Is A Car Loan?

Having a car is one of the necessities of life in most cities and towns across the U.S., where people often drive long distances for work and leisure. Indeed, the road trip is a quintessentially American experience, and getting a driver’s license is practically a teenage rite of passage.  However, buying and maintaining a car can be expensive, and most people in the market for a car, especially first time buyers, do not have the financial leeway to pay thousands of dollars up front. Instead, most buyers take out a car loan in order to purchase a new or used vehicle, receiving full ownership and the title to the vehicle when the loan is fully paid back. Car loans are available from private lenders, banks, credit unions, and most car dealerships. A car loan is a common financing instrument whereby the lender loans the borrower the amount they need to purchase a vehicle. The borrower then pays the lender back the principal amount plus a set amount in interest over the course of several months. While the borrower is able to take immediate possession of the car and use the vehicle at their discretion, the car is in effect the property of the lender until the loan is fully repaid. The borrower has to pay back the lender in monthly installments which are calculated to include interest as well principal payments. If the borrower defaults on the loan, the lender can repossess the vehicle and sell it in order to recoup at least part of the loan amount. Car loans are available at variable interest rates depending on a number of factors including the borrower’s credit score, employment status, and driving history. Borrowers who have a good financial standing will typically receive lower interest rates than those who do not. Some lenders and car dealerships require a down payment as well, although this is optional for many lenders. However, having a reasonable down payment can help lower interest rates. The term of a standard car loan can run anywhere from two years to eight years, although a fixed term of five years is more the norm. Interest payments are typically assessed on a monthly basis, although this again is variable based on the lender – some lenders calculate interest daily or biweekly. In general, borrowers pay more in interest payments toward the start of the loan term and less with each successive payment. This means that as the loan term progresses, borrowers can pay down more of the principal with each payment. This might give some borrowers enough financial leeway to consider paying off their loan in its entirety prior to the end of the loan term. However, not all lenders allow for early repayment and those that do often charge borrowers a fee for paying off their loan early. When looking for a car loan, keep in mind that you will also have to pay processing fees, closing costs, dealership fees, and taxes so your budget needs to be able to accommodate these additional expenses. Most lenders also require car owners to maintain a valid auto insurance policy and keep their vehicle in good repair. Borrowers need to take all of these factors into account before deciding which lender’s car loan offer would make the best financial sense for them.
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