What is a car loan and how does it work?

I want to buy a car, but I've never had a car loan before. In fact, I don't even know what it is. How do they work?

Answer
If you’ve never taken out a car loan before, the process may seem intimidating. But don’t stress! It’s surprisingly simple if you know where to start.
Generally speaking, a car loan is a financial instrument that allows you to borrow money from a lender to purchase a car. In return, you have to repay the borrowed amount plus interest and the lender keeps a lien on your car, which gives them legal rights to your vehicle if you don’t repay the loan.
To get a car loan, follow these steps:
  • Take a look at your credit report to find your score and settle any outstanding debt
  • Shop around for the best rates with banks, online lenders, credit unions, dealerships
  • Show proof of income, like W-2s or pay stubs
  • Show verification of identity
This should allow you to apply for preapproval, whereby the lender tells you how much you’d have for a loan so you can budget the right vehicle.
From there, you’ll need to decide on a car, the length of loan you want, and how much you can give as a down payment. As a general rule, a 48-month loan and a 10% down payment are ideal.
One more thing: before you can drive the car home, you will have to show proof of full coverage car insurance. Jerry can help. Just complete a 45-second sign-up to compare dozens of competitive quotes from top insurers like GEICO, Allstate, and Nationwide.
Eric Schad
Answered on Nov 17, 2021
Eric Schad has been a freelance writer for nearly a decade, as well as an SEO specialist and editor for the past five years. Before getting behind the keyboard, he worked in the finance and music industries (the perfect combo). With a wide array of professional and personal experiences, he’s developed a knack for tone and branding across many different verticals. Away from the computer, Schad is a blues guitar shredder, crazed sports fan, and always down for a spontaneous trip anywhere around the globe.
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