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How do car loans work?
I want to buy a car, but I don't have the cash. My friend told me I should get a car loan, but I have no idea how to do it. How does a car loan work?
Will Baldwin · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
It’s a good idea to know what you’re committing to before making any big financial decisions. Thankfully, car loans are super common and not too complicated to understand.
A
car loan
is when a lender, such as a bank, provides you with money to purchase a car. Over time, you pay this amount back plus interest, which is how the lender turns a profit. Your car is held as collateral, meaning that if you fail to make payments, the lender can take possession of it.You’ll have to make monthly payments toward the interest and the principal, or the original amount you owe. Depending on your credit score, income, and the length of the loan, your interest rate could vary from around 2% to over 10%.
Car loans typically last 24 to 84 months. The longer the loan, the less you pay monthly, but the more you pay in interest. Conversely, the shorter the loan, the more you pay per month, but the less you pay in interest.
Take note that every lender will require you to have full-coverage car insurance on the vehicle. If you don’t know where to start looking, use the
Jerry
app to compare competitive rates from up to 50 top providers and secure an affordable policy.View full answer
- Gregory R.
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Jerry partners with more than 50 insurance companies, but our content is independently researched, written, and fact-checked by our team of editors and agents. We aren’t paid for reviews or other content.
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