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Borrowers use a car loan to purchase a new or used automobile for transportation purposes. Bankers provide car loans with varying terms and payment schedules.
Significance
Borrowers usually consider a car loan as their second-largest monthly obligation, behind a rent or mortgage payment.
Function
Borrowers typically procure a loan before buying a car. Another type of car loan, called a title loan, occurs after you pay off your car. The lender gives you a loan in exchange for the title to your car, typically at a very high interest rate.
Time Frame
Lenders typically construct car loans on a 3- or 5-year amortization term, depending upon the needs of the borrower.
Considerations
A borrower should not commit to a loan with terms exceeding the expected life of the car.
Misconceptions
Many borrowers assume that once the car is sold, such as when trading it in at a dealership as a down payment for a newer car, their debt obligation is lifted. If the trade-in value is less than the amount remaining on your loan, you become "upside down," owing more than your car is worth.
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