What is a car loan and how does it work?

06 September 2021
Agboakiosime Imoudu

Is your car no longer ideal for your growing family? Are you worried about your safety and that of your loved ones while using public transportation? Then you need to purchase a car. A new or newer car will give you more privacy and peace of mind. It will also grant you the freedom to go where you want when you want. 

If you don’t have enough money to buy a car or you don’t want to reduce your savings by paying cash, then you can get a car loan. If you want to buy a car and need a loan, you’ll want to read on so you learn a thing or two before taking that bold step. 

What is a car loan?

A car loan is an agreement with a lender that permits you to borrow the money you require to purchase a car. It comes with interest, and you have to repay the total amount over a stipulated period. The main advantage of a car loan is that it makes the cost of your car manageable. You make monthly payments that usually don’t put much strain on your budget. 

How does a car loan work? 

A typical car loan provides a lump sum that enables you to purchase a vehicle of your choice. But before you seal the deal with your signature, you need to know what the terms are. There are at least four main areas to look at in any car loan. These are the loan amount (principal), the loan term, the annual percentage rate (APR), and the down payment.

The principal is the amount you borrow from the bank or financial institution to purchase the car, while the loan term refers to the agreed repayment period. This can take several years and is often negotiable. The APR is simply the interest rate you pay on the car loan. It differs from one financial institution to another. Lastly, the down payment is the amount of cash you provide upfront for the vehicle.  

While most car loans require you to make a down payment, it is possible to find financial institutions that waive this condition. One such institution is ikanobank.dk.