Today, many residents of the United States have the opportunity to purchase the desired things when they want, and not save up for them for several years or months. This is especially true if you want to purchase a car since not everyone can buy a car with their own funds. What do you need to know about auto loans?
What is an auto loan?
An auto loan is a loan that a person takes out in order to purchase a motor vehicle. They cannot be spent on something else since the money is transferred directly to the account of the car dealership where the purchase of the car is planned. This is the main feature of an auto loan.
One of the differences between an auto loan and a consumer loan is that in the first case, you will have to pay collateral, which is the vehicle. This suggests that until the loan is repaid in full, the owner will not be able to sell it.
Auto loans have the following 4 features:
- The borrower will need to make the first advance from its own funds. It should be noted that the loan only covers a part of the cost of the car. There are also preferential car loan programs, in which the specified payment is absent;
- If the client has purchased a car through an auto loan, he or she is not allowed to use the vehicle in commercial or industrial activities. In order to buy a car for these purposes, it is necessary to get a commercial car loan;
- The buyer must pay for insurance in case of disappearance or reduction in the price of an auto caused by destruction, damage or deterioration of the structure, as well as theft. There are also programs that provide the borrower with a choice whether to insure a car or not, but this is rare;
- The borrowed funds are not issued to the borrower but to the legal entity that transfers ownership.
Pros and cons of an auto loan
An auto loan has the following advantages:
- You can use the vehicle right away, there is no need to wait several years or months until you get the required amount;
- You can choose the car that you want, and not the one which you get the funds for;
- You can choose a suitable loan program;
- The period during which you need to repay the loan is usually 1-5 years;
- Compared to consumer loans, the interest rate is lower.
The disadvantages are:
- The registration procedure can take up to several weeks;
- Rather strict requirements are imposed on the client (age limits);
- Since the car is the subject of collateral, the bank has the right to take away the vehicle in case of payment delays;
- Insurance can be quite expensive;
- If you do not make an initial payment, the loan rate becomes higher.
Before deciding whether to take an auto loan, you need to understand how a car loan for a new vehicle works, evaluate all the pros and cons. If you have a good regular income, then you can safely apply for a loan.