What Is Car Loan? How Does It Work
27th September 2024
When you're in the market for a new or used car, one way to finance the purchase is through a personal loan. A personal loan is where you borrow money from a lender to pay for a car upfront. You’ll then repay the loan in monthly instalments, which include both the amount you borrowed (the principal) and interest, over an agreed period.
How does a loan for a car work?
The process of taking out a loan can be relatively straightforward with the right lender. At Oakbrook Loans, for example, the application process is fully online and designed with users’ convenience in mind. Using a loan calculator, you can enter the amount you wish to borrow and choose a loan term between 3 and 5 years. The calculator helps you see what your monthly payments will be, giving you a clear idea of whether the loan is affordable.
What information do I need when applying for a car loan?
When applying for a loan, you’ll need to provide some personal details, and Oakbrook Loans will assess your eligibility based on your credit history, affordability and other financial information. This helps to determine whether you can comfortably afford the repayments. Importantly, applying for a quote doesn’t impact your credit score.
Car loan terms to know
Before taking out a car loan, it’s helpful to understand some of the common terms:
- APR (Annual Percentage Rate): This is the total interest you’ll pay over the life of the loan, expressed as a yearly rate. It includes any additional charges or fees.
- Principal: This is the amount you borrow to pay for your car.
- Interest Rate: The percentage charged on the loan, based on the amount you borrowed.
- Loan Term: The length of time over which you’ll repay the loan, which can vary depending on your financial situation.
- Monthly Repayments: The amount you’ll pay back each month, covering both the principal and interest.
- Total Repayable: The total amount you’ll pay back over the loan term, including the principal and any interest.
How is a car loan different from car finance?
Car loans and car finance are often confused but operate in different ways. When you take out a car loan, you’re borrowing a lump sum from a lender, which you use to purchase the car outright. This gives you immediate ownership of the vehicle, and your monthly payments go towards repaying the loan rather than paying for the car itself.
Car finance refers to the range of specialist agreements that can help you to pay for a car. The three main types are:
Hire Purchase (HP): You make an initial deposit and then pay off the remaining balance through monthly instalments. You don’t own the car until the final payment is made.
Personal Contract Purchase (PCP): Similar to HP, but at the end of the agreement, you have the option to pay a final ‘balloon payment’ to own the car outright, trade it in for a new car, or hand it back.
Leasing: You will pay monthly payments to use the car for an agreed period. At the end of the term, you will return the car. There is no option to own it.
The key difference between car finance and a car loan is that with a loan, you own the car straight away. This means there are no restrictions on mileage or modifications, as you’re not tied to a finance agreement.
Advantages of a car loan
Taking out a car loan comes with several advantages:
- Ownership: You own the car from day one, which gives you more freedom in how you use and maintain the vehicle.
- Flexible Loan Terms: Car loans allow you to choose a loan term that suits you, whether you want to repay it quickly or spread the payments over a longer period.
- No Mileage Limits: Unlike some car finance agreements, a car loan won’t restrict how much you drive the car.
Things to consider when taking out a car loan
While a car loan can be a great way to finance your vehicle, it’s important to keep a few things in mind:
- Repayment Commitment: Take time to consider all available borrowing options before making a decision.
- Affordability: Be sure to assess whether the monthly repayments fit comfortably within your budget.
- Long-Term Ownership: Ensure that the car model you purchase is one that you’re happy to keep for a while, as car loans typically last several years.
- Buying From a Trustworthy Dealer: Always ensure that the dealer you’re purchasing from is reliable and that you understand your rights and insurance coverage.
By understanding the terms and benefits of different finance options, you can make an informed decision and find the best way to finance your new car.
Conclusion
In summary, a car loan could offer a straightforward way to finance your next vehicle, giving you the advantage of ownership from the start. By assessing your affordability, and choosing a reliable lender like Oakbrook Loans, you can feel confident in making a decision that suits you.