How Do Car Loans Work ? - Life Beyond Certificate

How Do Car Loans Work ?

How do Car Loans Work?

Getting a car is something people term as a great feat in life almost like getting a house. The ease that comes with being able to go where you want, when you want, and with comfort can not be compared to jumping on public transport or waiting for a taxi or uber to arrive. But getting a car isn’t easy for everyone, that’s because it’s not cheap. Not everyone can afford to buy a brand new car immediately, which means, other legitimate options will have to be considered in getting it. One of those options is a car loan.

What is a Car Loan?

A car loan is a sum of money an individual borrows to buy a car. From the definition, a car loan is gotten to buy a car and it’s very much different from personal loans. Unlike car loans, a personal loan is a money borrowed to purchase anything which also includes a car. A car loan is usually gotten from financial institutions or companies like banks, insurance companies, trust companies, etc on a short-term or long-term basis.

When getting the loan, the borrower will agree to pay back the total amount borrowed to purchase the car, alongside an interest by a certain date or duration. But there’s more to getting a car loan, it’s not all about getting the car loan and paying a certain amount every month. There are things you need to understand, you need to consider how long you want to spend paying off the loan and if a short-term or long-term payment plan is the best for you. Understanding key terms and how they relate to your car loan will help you with these considerations and make the right decisions.

Key Terms to Understand

Before you get your car loan, you must know the following terms and what they mean:

  • Annual percentage rate: This is the amount to be paid to borrow the money. This includes the interest, expressed as a percentage.
  • Interest rate: This is a bit similar to the annual percentage rate, the only difference is the exclusion of the loan fee. It is an extra amount paid above the principal fee which serves as the profit.
  • Principal amount: This is the total amount borrowed, interest not included.
  • Loan term: The duration you have to pay off the loan.
  • Down payment: This is the amount paid upfront before getting the car. Though it is possible to get a car loan without making a down payment, it’s not advisable to do so. Many lenders are willing to overlook this so you end up paying more interest and the overall total cost will be high.
  • Total cost: This is the total loan amount, including the principal and interest rate to be paid.

Among the terms listed here, three have an impact on your monthly car loan payment.

How does the loan amount, annual percentage rate and loan term affect the monthly car loan payment?

If you are asked to pay a smaller amount every month till you pay off your loan you would pick it right? That’s because it sounds like a great offer. But you must look at the big picture. Paying a smaller amount will mean having a higher loan term which also means a higher interest rate.

For example, you get a car loan of about $25,000 (N10.4 million) at a 3% APR for a 48-month loan term. In 4 years time you would have paid $1,561 (N649,200) in interest. Now, if you extend the same car loan to a 60-month loan term, in 5 years you would have paid $1,953 (N812,311) even though the monthly payment will be reduced.

Advantages and Disadvantages of Getting a Car Loan

To begin with, it is never a good idea to take out a car loan that you will be unable to repay. This means that you must have a repayment strategy in place before taking out a car loan. So, what are the advantages and disadvantages of vehicle loans?


  • Instead of waiting for years to get a car, you can get it immediately with car loans.
  • Just like borrowing money from a friend and paying it off on time, your friend won’t hesitate to lend whenever you come borrowing. The same applies to financial institutions when you pay off quickly. That credibility will make it easier to get loans faster from them.


  • Some of these financial institutions charge a very high-interest rate that sometimes it’s hard paying them off.

Specific dates chosen for payment must be adhered to. If a particular date is skipped, the interest rate adds up which automatically increases the total cost to be paid back.

How can one get a car loan?

Getting a car loan isn’t difficult once you meet certain requirements. First, you need a constant source of income to prove you are capable of paying off the loan. Second, you might need to provide your bank statement for the financial institution to go through your financial history.

Sometimes, the place of work has a huge influence on getting the loan. If you work for a well-known company, you stand a greater chance of getting it. But you shouldn’t worry about it. Now you know how car loans work, go get that dream car.

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