A car loan is usually provided by financial institutions or car dealerships. The collateral or security is the vehicle itself. If you do not make your car payments, your lender could repossess your vehicle. They could then sell your vehicle to try to recover the money you owe them.
If you are planning to buy a car, unless you can pay for it entirely in cash, you may need to take out a car loan. A good rule of thumb is to aim to save a 20 percent down payment towards your new vehicle. You can then use the car loan to pay for the rest of the car’s price.
When looking for a car loan, there are several things to consider. Look at the interest rate, payment schedule, any financing fees, loan amount and the length of the loan. Be sure to review all these details ahead of time before agreeing to car financing. It also helps to shop around to see if there are better deals out there.
In recent years, the trend has been towards longer-term car loans. A car loan term of seven or eight years makes your monthly payments more affordable. But, you can end up in a situation of negative equity. You may still owe money on a car that no longer works. That is why it is a good idea to limit your car loan to a maximum of five years.