Why would I need a car loan?

Answered by Car Loans Expert Jim on December 28, 2020

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?

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Car Loans Expert

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.

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