Buying a car is, in most cases, a landmark decision in one’s life because it signifies their financial stability, and is one more step towards being thought of as settled. However, in today’s time, buying a car is nothing short of a luxury. If you wish to own a car but lack adequate funds to buy one, you are one of the many individuals in the country but luckily, this is where car loans can come to your rescue.

Applying for a car loan can be confusing if you are doing it for the first time. So, it is better to understand the basics of a car loan by asking around and conducting thorough research. Doing so will help you negotiate a good deal with good interest rates.

What is a car loan?
A car loan is a type of personal loan that is used for buying a car. A lender will lend you the money required to buy a car. In exchange, you have to assure them that you will repay the loan along with interest. Repayment is done through monthly installments and continues until you pay the entire loaned amount, including the interest.

Basic components of a car loan

• Cost of the loan:  The cost associated with car loans can be divided into two parts, namely, the principal amount and interest. The original amount that you borrow from a lender is called the principal. The amount depends on the price of the desired vehicle. The interest is a summation of costs accrued until the loan term ends. The interest depends on the fixed interest rate and the principal amount.

• Interest rates:  An interest rate is a fee that a lender charges you for the monetary provision they provide. In other words, the interest rate is a percentage of the principal amount that has to be repaid along with the amount borrowed. The percentage represents the yearly cost of the loan and is called the annual percentage rate (APR).

• Down payment:  Down payment is described as a token amount paid to a car dealer at the time of purchase. It is determined by using a fixed percentage out of the total price. This percentage is set by the dealer. Though it is not legally needed, lenders compulsorily use it for approving car loans.

• Terms and conditions:  Terms and conditions are the most detailed description of car loans. Basically, they are a set of guidelines and regulations in the fine print. You have to adhere to these regulations as a borrower. Terms and conditions include the loan term, registration and insurance requirements, maintenance requirements, conditions related to repossession on default, conditions related to accident or theft, resale terms, and loan payoff terms. There is a wide range of conditions that you should read carefully. Reading them gives you a proper understanding of a loan before you finalize the deal. Not doing so could lead to a tricky financial situation in the future.