Most people will need to buy a care at some point in their life. When they do, most of them won’t be able to pay in cash. This leaves many of them wondering how car loans work, and whether they should get one. Car loans are a convenient and widely available way to make up the difference between the cost of the desired vehicle and the money at your immediate disposal. Such loans work much the same as other personal loans, though their sheer diversity means that applicants should be careful when entering into contracts.
Applying For Car Loans
A car loan begins with an applicant collecting the required documents, completing the loan application, and then submitting the application to the desired lender. Required documents are likely to include personal ID to certify the borrower’s identity, proof of income to show the borrower’s ability to repay the loan, and a credit check. The lender will then either approve or reject the car loan applicant based on the submitted information. Once an applicant has been approved, the lender will then offer that applicant specific loan conditions chosen using the same information. In general, the applicant will be required to make a down payment on the cost of the vehicle and secure the car loan by using the purchased vehicle as collateral. Riskier applicants are also likely to receive harsher loan conditions such as higher interest rates and shorter loan repayment terms.
Regardless, once an applicant has been approved and has agreed to the loan conditions, the lender will lend that applicant the money to pay for the desired vehicle. This sum is called the principal of the car loan, which is also the figure that is used to calculate loan interest.
Here at Keystone Auto Loans, we allow our clients to apply online for financing. This saves you, the applicant, from having to submit applications with multiple lenders, and potentially facing rejection in-person.
Managing Car Loans
At the end of each relevant time period in the loan term, the borrower is required to make a minimal payment that goes towards repaying the car loan. Part of the payment covers the interest charged on the principal for the period while the remainder goes towards paying down the principal. Borrowers can choose to make bigger or more frequent payments if they want to pay off their car loans faster and thereby pay less in interest on those same loans. Regular payments must be made until the loan principal is entirely paid off or until the borrower becomes unable to afford them.
Completing Car Loans
Once a borrower finishes repaying the principal, the borrower’s obligation to the lender ends and the lender loses its claim to the vehicle. The same is not true when the borrower becomes unable to make the payments and defaults. What happens next depends on the loan conditions of the car loan that has been defaulted upon. For example, if a borrower had a co-signer for the car loan, that co-signer becomes responsible for repaying the loan. If the co-signer also defaults or the borrower has no co-signer, the lender can launch efforts to repossess the collateral used to secure the car loan. In most cases, the vehicle purchased using the car loan is also used as the collateral. Lenders can also resort to more punitive measures such as sending collection agencies and even suing the borrower in court.
However, some lenders are willing to compromise a little with borrowers who have demonstrated good faith and creditworthiness in the past. Such compromises can include minor changes in loan conditions that make it easier for borrowers to repay their car loans. Lenders are potentially willing to do this because they can recover more of their investment by having borrowers repay their loans than by resorting to other means. After all, lawsuits and collection agencies are costly while selling repossessed vehicles is unprofitable because vehicles quickly lose their value once they are sold for the first time.