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Car Loan

Auto Loan Guide Step 1: The Car Loan Basics

    So its sleek design and plush interior got you hooked, huh? Or maybe it was its impressive miles per gallon ratio. Either way, after sitting inside and smelling that new car smell, you were a goner. And now you need a car loan.
    Don't worry, I'll be the last one to tell you not to get it. I'm sure the car's a beauty, and with the great lack of public transportation, owning a car has become a necessity. But before buying you should realize that cars are one of the worst investments you can make. Other than your home, cars are typically the most expensive item people buy. And normally when you spend that much money, you make money when it comes time to sell it. But cars don't work that way. They depreciate over time, which is a fancy way of saying that they lose their value. So basically, when you buy a car, you spend lots of money, and then when you sell it, you make very little.
    You may wonder why that happens. Well, for starters, as cars age they become less useful. Their tires wear out. Their engines go bad. And the only way to make them run like when they were new is to replace everything that doesn't work, which is expensive. As a result, the car loses value because it doesn't work as well.
    But that's not the only reason why cars' values depreciate over time. Car technology is constantly improving. New safety features are added. Engines become more efficient. So naturally people want cars with those improvements. They see the nice, shiny, new cars and drool. But when they see used cars, they think that will do. The huge value people put on owning a new car also helps to lower used cars' values, which shouldn't be surprising. After all, they like that new car smell too.

So What Does That Mean?

    Well, all it really means is that you should still get the car. But before getting a car loan, you need to be aware that cars do lose value and that you won't make any money. In fact, you will lose money. So you may want to rethink the type of car you are getting. Instead of saddling yourself with a huge car loan, you could save money by purchasing a cheaper car and use the extra cash for good investments.

How a Car Loan Works

    Now that you understand that cars lose their value, it's time to talk about the car loan. Most car loans have term lengths anywhere from 24 to 72 months. The term length for your car loan is how long you have to repay your loan. For example, if you had a 36-month loan term, then the amount you owe for your car loan would be distributed in equal payments over the 36-month period. The longer your car loan term length, the lower your monthly payments.
    Interest rates for car loans are normally fixed, which means that the interest rate never changes during the life of the loan (Nerad 133). The interest rate on your car loan is how much you are being charged for borrowing the money to pay for the car. The higher your interest rate, the more money you have to pay. That's why it is so important to look for low interest rates when car loan shopping.
    Typically, car loans have lower interest rates than unsecured personal loans or credit cards. Therefore, it is much smarter to buy a car using a car loan than it is to use an unsecured personal loan or credit cards. But don't freak out when you compare the interest rate on your car loan to your personal loan. Normally car loan interest rates are higher than mortgage interest rates. That's because lenders view car loans riskier than mortgage loans. Which makes sense considering that cars lose their value and if you happen to default on your car loan lenders might not be able to sell them for as much as you still owe. Not to mention, cars move. And if a lender wants to repose a car they have to find it first, which costs money (Edelman 369).

Where to Find a Car Loan

    You can get a car loan from finance companies, car dealerships, banks or credit unions (Nerad 132). Some people choose not to get a car loan and instead get a home equity loan. The benefit of getting a home equity loan is that the interest rate might be cheaper than car loan interest rates (Boyett 133). However, you need to be aware that if you can't make your monthly payments on your home equity loan, your lender can take your house; whereas, if you can't make your monthly payments on a car loan, the lender only gets your car.

The Rest of Our Auto Loan Guide:


Edelman, Ric. The Truth About Money 3rd Edition. New York: HarperCollins, 2004.

Nerad, Jack. The Complete Idiot's Guide to Buying Or Leasing a Car. Indianapolis: Alpha Books, 1996.

Boyett, Joseph H. The Guru Guide to Money Management. Hoboken: John Wiley and Sons, 2003.