How Car Loans Work

I’m graduating soon, and I’m going to be on my own financially. One of the things I’m sure I’ll have to do pretty soon is buy a car, as I’ll be moving off campus and won’t necessarily have easy access to my new workplace. But I’m not sure I understand how car loans work. What determines the rates on those–it’s my credit, right? But how is my credit calculated? And should I even take out a car loan at all, or is taking on debt to buy a vehicle a bad idea? Experts, please help!

Personal finance can seem complicated at times, but making the right decision is often easier than it may appear. Loans–including car loans–are good examples of things that often seem more complicated than they actually are.

As with any other type of loan, the idea behind a car loan is that you are borrowing money that you will have to pay back with interest. The interest is what makes it worthwhile for the lender to let you have their cash for a while. But a car loan also has another dimension to it. You probably know that if you don’t pay your car loan off, the lender can repossess your vehicle. That’s actually a good thing for responsible borrowers, because it makes car loans something we call a “secured loan.” Secured loans have “collateral”–the car, in this case–that lenders can take if the borrower defaults. That lowers the risk for the lender, which translates to lower interest rates!

Of course, interest rates vary from person to person. That’s because they are indeed based, in part, on your credit score. Your credit score, in term, is determined by a bunch of different factors. For all its complexity, though, your credit score can be pretty effectively controlled by focusing on just a few factors, particularly how much debt you already have and how regularly you pay your bills.

You could still get an auto loan with bad credit through some lenders and dealers, say the consumer finance experts at Apply & Buy. A low credit score, or a lack of credit, isn’t always a barrier to getting a loan.

But should you get a loan at all? You’ll find advice from all kinds of perspectives, but most experts agree that it’s not a bad idea to take out a car loan, provided that you are sensible about your budget. Not all loans are healthy–payday loans, for instance, are dangerous–but car loans are usually not predatory. There are pros and cons to car loans, but if your payments are affordable and your loan allows you to get a car that you need at the beginning of your career, it’s alright to take on a conservative amount of debt.

Just remember to follow the laws of the road and drive safely as getting into an accident can cause your insurance premiums to rise and be a detriment to your finances. If you do find yourself in a serious accident, be sure to seek out the help of a motor vehicle accident attorney as you may be able to mitigate some of the costs and even have the other party held responsible for repairs if it can be proven that the accident was not your fault.

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