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What Is A Car Loan?
By: John Mussi
A car loan is a type of credit offered by a bank or other financial lender for
the specific purpose of buying a vehicle. Car loans allow you to finance buying
a new or used car .
There are a range of car loans available from banks, building societies or
financial institutions; you can also take out a car loan with a specific car
loan lender .
Car loans are the most popular type of loan that people apply for. Car loans, as
the name suggests, are unsecured loans specifically designed for the purchase of
a car.
Car loans can be seen as a riskiest of loans from the lender's point of view.
This is because unlike a secured loan that may be used for home improvements
that can add value to your home; a car loan is for an asset that depreciates
very quickly. Thus you will find that car loans have generally a higher rate of
interest than any other type of loan.
A car loan does not require any collateral to apply. Almost all loan providers
will allow you to apply for a car loan, with a few specializing in this area.
The main reason people may apply to a specialist car loan provider (such as car
dealers) may because their credit rating is not good. Please be warned that you
will pay a higher interest rate from these specialist firms.
You enter into an agreement with your lender to borrow a specified amount,
usually up to a maximum of £25,000 depending on your circumstances. You then pay
back the loan over a set period of time.
The payments you make consist of both the principal amount of the loan plus
interest. With this type of loan you own the car from the time you buy it. Car
loans are form of personal loan of which there are several basic types with
slightly different conditions attached.
There are three different types of car loan:
Manufacturers' schemes
You see these types of loans advertised by the car manufacturer and these can be
arranged either directly with them or via a local car dealership. Part exchanges
on your current vehicle are normally accepted, and the remaining balance is paid
through a loan. As with a hire purchase scheme, you will not be the owner of the
vehicle until you have repaid the loan in full. If you default on repayments,
the car will be repossessed.
Hire purchase (HP)
This sort of car loan is arranged by car dealerships, and in effect it means
that you are hiring the car from the dealer until the final payment on the loan
has been paid. When the loan has been fully repaid, full ownership of the
vehicle is transferred to you.
Personal Loan
You have the option of either taking out a general personal loan, or a personal
loan designed specifically for car purchase. The two are almost identical, but
because a car loan is taken out specifically to buy a car, the lender may offer
you car-related incentives such as emergency breakdown cover, free motor
insurance or special discounts on car accessories. Personal loans normally have
lower interest rates than manufacturer schemes or hire purchase loans.
About the Author:
John Mussi is the founder of Direct Online Loans who help UK homeowners find the
best available loans via the
www.directonlineloans.co.uk website .
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