A car loan is a special type of personal loan, which allows you to spread the cost of a car over an extended period of time, rather than paying the entire sum all at once. In return for this loan, you must pay interest to the bank or building society from which you have borrowed the money, which means that the total amount you repay will be greater than the amount borrowed. Generally, you pay back a small percentage of the loan each month, plus the interest charge: this is referred to as your monthly repayment.
There are two basic types of car loan: secured and unsecured. A secured car loan provides the lender with a specified item of security; in the event that you are unable to repay the debt, the lender has the right to take possession of this item, which in the case of a secured car loan is usually your car itself. An unsecured loan does not require you to provide an item of security, but as a result, this type of loan usually costs you more.
Before you take out a car loan, you should familiarise yourself with your credit report. A credit report is a document which records how you have gained and used credit, such as loans, mortgages and credit cards, in the past. This document can help you to consider whether or not your application for a car loan is likely to be accepted, and will assist you in choosing the loan that best meets your needs.
Remember that a loan requires good financial management. If your personal circumstances change, you may find that you are no longer able to meet the monthly repayments, see Missing Payments. Many lenders will offer Payment Protection Insurance (PPI) when you take out a car loan. PPI covers the cost of your loan if you are unable to make repayments due to redundancy, or an accident or illness that affects your ability to work. Alternatively, you may wish to consolidate a range of debts by contacting a debt management company or by visiting a financier. For more information about managing car loan debt see Managing Debt.
