An auto loan allows you to purchase a car over time without having to completely pay for the purchase initially. There’s several advantages to obtaining a car loan. An auto loan will allow you to purchase a more expensive vehicle than you could afford without such a loan. An auto loan can also help to build your credit rating. Additionally, unlike leasing, at the end of the auto loan you will own the vehicle outright. Let’s take a look at some more of the benefits of getting a car loan.
Owning vs. Leasing
When you purchase a vehicle using an auto loan, you will typically make a down payment and monthly payments for the term of the loan. At the conclusion of the loan, you will own the vehicle outright. Leasing, on the other hand, is a form of renting a vehicle. With a lease, you will still make monthly payments. However, at the conclusion of the lease, you can either choose to buy the vehicle for a predetermined lump sum or return the vehicle to the dealer. As a form of renting, leased vehicles also commonly limit the amount of miles you can drive during the duration of the lease.
Purchasing a vehicle using an auto loan can help to build your credit. Always make your car payments on time and do not agree to a car loan you cannot afford. An auto loan is a type of installment loan. This means that you pay a specified amount every month and the loan terminates at the end of the specified term. Unlike a revolving loan, an installment loan does not feature a credit limit. A credit card is the most common example of a revolving line of credit. Credit bureaus generally consider an auto loan a favorable line of credit and paying the loan back over time will, therefore, typically improve your credit score.
When you initiate an auto loan, you will usually have to make a down payment. The specific amount of this down payment will depend on the loan. Various lenders offer several auto loan options that require varying down payment amounts. Because an auto loan allows you to finance the vehicle over time, these loans allow you to purchase a more expensive vehicle than you could purchase if paying by cash. The auto loan’s monthly payment depends on the down payment made, the purchase price of the vehicle and the term of the loan.
Many lenders now offer auto loans with terms longer than six years. These longer-term loans generally reduce the monthly payment required for the duration of the loan. However, you should exercise caution when agreeing to long-term car loans, as the loan will normally exceed the vehicle’s warranty period. Also, look for auto loans that do not require you to pay a prepayment penalty should you choose to pay off the loan prior to the contracted term.