A car loan is a loan designated for the purchase of a vehicle. The loan cannot be used for anything else. Buying a car can actually save money if you spend a lot of cash on taxis and public transportation. When you apply for a loan, you should know what to expect. This will help you make an informed decision as to whether a car loan is the path you want to take.

Function

Car loans are loans given to individuals who do not have the money to purchase a car with cash. Car loans benefit both the borrower and the loaner. They are a means to obtain a car and also benefits the lender, who will be collecting interest on the loan.

Types

There are two basic types of car loans. The first type of car loan is an unsecured loan with a bank or financial institution. Most applicants apply at the car dealership for this loan. To apply for the car loan, you will need to show your driver’s license and have at least one month’s worth of pay stubs. If you are a younger driver and you don’t have a steady job, the company may ask you to find a co-signer for the loan. The second type of car loan is a private loan. This loan is obtained by entering in to an agreement with someone who has cash to purchase the car. This could be a family member, friend or advertised private lender. These contracts may be oral or written and may or may not include interest. Family members don’t often charge interest, but private lenders will. All contracts should be investigated thoroughly before signing. All written contracts are legally binding in a court of law.

Time Frame

After applying for the car loan at the dealership, you will have to wait up to 30 minutes to find out if you have been approved or not. Car salesman don’t want you to leave the lot without a car. If you need a co-signer, you will have to wait until the co-signer can arrive at the dealership. This could take minutes or another day of the week when the co-signer is off of work. If you choose to use a private lender, you may have to wait a few days to find out if you have been approved. This is because the private lender may choose to run a credit check on you or call the references you listed.

Considerations

Car loans are unsecured because cars depreciate in value as soon as they are driven off of the car lot. If the buyer defaults on the loan, the bank will not be able to recuperate all of its money. Because the car loses value, the financial institutions charge a high amount of interest. These interest rates are higher than any other type of loan. Despite the high interest rates, car loans are some of the easiest loans to get. Many dealerships will give you financing if you can prove that you are working. The amount of money you make at your job will determine how high of a loan you will be approved for.

Warning

If you are a co-signer for a car loan, you will be responsible for paying back the entire loan if the buyer defaults. If you don’t pay off the rest of the loan, the financial institution legally can come after you. If it wins a judgment in court, your wages could be docked or you could even have a lien put on your house. You should also expect that the relationship you had with the buyer of the car will become strained or non-existent after a default occurs. Do not agree to co-sign any loans unless you are willing to pay for the car if the buyer doesn’t.