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Q: What is an Auto Loan?

December 17, 2013 12:53 PM

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Most people who purchase a vehicle take out an auto loan to pay for it. That's the most common way of financing vehicle purchases and can help raise your credit, if handled responsibly. Read on for more information about auto loans.

Most vehicles cost tens of thousands of dollars, making it unlikely that you will be able to buy a vehicle outright. Your vehicle price depends on whether you purchase a new car or a used car. The vehicle price also depends on the car value. Whatever the price you're asked to pay, an auto loan can help you be able to purchase your vehicle right away.

Basically, when you take out an auto loan, the lender pays for the vehicle and you then have to pay the lender back through monthly installments. Depending on the agreed-upon terms, it usually takes between three and seven years to pay off the loan. The longer the term of your auto loan, the less you'll pay per month. However, you'll likely end up paying more overall for a longer-term loan, because you will have to pay additional finance charges and interest on the remaining debt each month.

The type of loan you qualify for depends on your credit history. If you have good credit, meaning that you have a history of having paid loans back on time and that you usually pay your bills on time, you can get a loan with more favorable terms than if you had poor credit. If you have poor credit, you may have to make a larger down payment or pay a higher interest rate over the course of your loan.

Taking out an auto loan usually makes sense for consumers who want to purchase a vehicle. Here are some of the top reasons for getting a car loan:

-- You can get your vehicle more quickly. It could take years to save up enough to pay for a vehicle outright. If you qualify for an auto loan, you can get your vehicle right away, even if you don't have enough money to pay for it all at once. Usually, if you can put down 20 percent of the vehicle's price as a down payment, you can get an auto loan.

-- You can sometimes improve your credit by being responsible with your auto loan. If you make all of your payments on time, it can help build (or rebuild) your credit score if your lender reports the on-time payments to the credit bureaus.

If you're thinking about buying a vehicle, an auto loan may be a good option for you. Getting a loan can help you purchase the vehicle of your dreams while simultaneously helping you improve your credit.

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