Why would I need a car loan?

I'm only 15, but I'm already thinking ahead to buying my first car. Why would I ever be in need of a loan?

At the risk of stating the obvious, cars are expensive! At the time of this writing, the average price of a new car is over $37,000. Even one of the least expensive new cars, the Chevrolet Sonic, costs over $16,000. Used cars can be much cheaper, but some are priced similarly to new cars. Since most of us don’t have that kind of cash lying around the house, if you need a car, chances are you will need a loan to buy it.
The good news is that car loans are widely available and can be made even if your credit isn’t great. Car loans are “secured” by the car you buy. This provides some comfort for the lender so that if you fail to make your payments, they can repossess your car and sell it to get their money back.
Lenders make their money by charging interest on loans. The price they charge (the interest rate) is a function of the risk presented by the borrower. A borrower with good or excellent credit is a lower risk and would likely be offered a lower interest rate. A borrower with poor or no credit is a higher risk. If they are offered a loan at all, the interest rate will be higher.
Jim Donaher
Answered on Mar 12, 2021
Jim Donaher is a freelance writer and manager with over 35 years' experience in the insurance, banking, and investment management businesses. He provides expertise on a range of topics and is able to explain complex industry information in layman's terms. Jim is the author of two books, including Call Him, He's Home: A Guide to Prayer for Regular People and Then Larry Smiled, a novel about life, death, accountability, and salvation. Taormina, Sicily is his happy place!

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