What is a Car Loan and how does it work?
Like its name suggests, a car loan is a loan taken for the sole purpose of purchasing a car, either new or used. Like all loans, you will borrow a certain amount of money from a lender and then pay them back over a certain amount of time, with interest.
Unless you have enough cash saved up to buy a car in a one-off payment, you will need to take out a loan to finance your purchase. While this may seem like a simple task, most people are uninformed about the ins and outs of car loans. Getting to know your way around car loans is imperative to making the best choice when choosing a loan option to suit your needs.
There are three important terms to understand that will affect your loan repayments and how much money you spend over the life of the loan.
The Loan Amount
This refers to how much money you borrow from the lender. In most cases, people opt to put an initial down payment on the car which means that they will borrow less from the lender. When taking out a loan, it is best to put a considerable down payment on the car because you will then borrow less from the lender. The less you borrow from the lender, the lower your interest rates will be and the more money you will save by the end of the loan life.
The Annual Percentage Rate
The APR is the interest rate you pay on your loan. This is the annual percentage cost a lender charges you for the loan. Essentially, this is how the lender makes money from lending you money, as it includes the cost of borrowing money as well as extra charges and fees. When looking for a suitable car loan, it is always best to spend time researching and comparing interest rates offered by various lenders. This is where platforms like TopCheck.com.ng are so helpful, as they do all the work for you. In such a competitive industry, some lenders will charger lower interest rates than others and that is why is it is important to find a lender with the most competitive interest rates on your loan requirements.
The Loan Term
This refers to the amount of time in which you can pay back the loan. The loan time can vary between long term and short term but this will depend on your agreement in the monthly payment plan. A longer-term loan typically has lower monthly payments than shorter-term loans but you end up paying more in finance chargers over the life of a longer-term loan. While short-loan terms may seem like the most economical choice, sometimes it is wiser to choose a long-term loan to ensure that you have enough cash flow each month to cover all of your other living costs.
Most importantly, remember that the car you're buying is collateral for the loan. This means that if you do not make the payments on time, the lender is legally allowed to repossess your car to sell it and pay off the outstanding loan. Always make sure that you can afford the monthly payments before buying the car and make sure to compare car loan options on TopCheck, before choosing the best option for you.
Example Car Loan: ₦500,000 Loan amount, 1-36 months duration, 1.92% monthly interest rate, 33.55% max APR, ₦1,003,250 total value, ₦51,250 max monthly repayment, Rosabon Car Loan