A car loan is a type of financing that allows an individual to purchase a vehicle by borrowing money from a financial institution, such as a bank or credit union. The lender provides the funds needed to buy the car, and the borrower repays the loan over time with interest.
The terms of a car loan can vary depending on the lender and the borrower's creditworthiness. Generally, borrowers are required to make monthly payments for a specified period of time, which includes both principal and interest charges. The length of the repayment term and the size of the monthly payment depend on factors such as the price of the car, the borrower's income, and their credit score.
Car loans can be either secured or unsecured. In a secured loan, the borrower offers collateral to guarantee repayment of the loan. This could mean using the vehicle being purchased as security for the loan. If the borrower fails to make payments on an secured car loan, they may lose their vehicle. An unsecured loan does not require any collateral and is based solely on the borrower's creditworthiness.
Overall, a car loan allows individuals to purchase a vehicle without having to pay the full price upfront, making it more affordable for many people.