An auto loan is an extension of credit that is designed to fund the purchase of an automobile. The lender loans you money at the time of purchase. You agree to repay the loan by making monthly payments for a period of years. The lender charges you interest for the loan and retainsa lien on the automobile to secure repayment. If you fail to make payments on the loan, the lender can repossess the car and resell it to pay off the loan balance.
- Down payment or a trade-in
- Fulfillment of lender's credit requirements
- Sufficient income to service loan
- Better interest rates than unsecured loans
- Convenient to obtain through auto dealers
- Principal balance on auto loan is often higher than value of car
- Interest on auto loans is generally not deductible
- Automobile is collateral for the loan and can be repossessed by lender
- Contract, usury, and motor vehicle laws vary from state to state
- Fairly easy to obtain, especially if you have a large down payment and good credit history
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