auto loan
A secured loan used to purchase a vehicle, with the car itself serving as collateral. Lenders can repossess the vehicle if payments are missed.
Example
“The 60-month auto loan at 4.9% financed $30,000 of the car's purchase price at $566 per month.”
Memory Tip
AUTO loan = secured by the car. Miss payments = car gets repossessed.
Why It Matters
Auto loans are one of the most common types of debt for individuals, making understanding their terms crucial for major purchasing decisions. The interest rate and loan duration directly impact your monthly budget and total cost of vehicle ownership, affecting your ability to save for other financial goals.
Common Misconception
Many people believe they own their car immediately after purchase, but with an auto loan the lender actually holds a lien on the vehicle until the loan is paid off. This means the lender has legal rights to repossess the car if you fail to make payments, even if you have paid off half the loan.
In Practice
Suppose you purchase a 25,000 dollar car with a 5,000 dollar down payment, financing 20,000 dollars over 60 months at 6 percent interest. Your monthly payment would be approximately 387 dollars, and if you miss three consecutive payments, the lender can legally repossess the vehicle regardless of how much equity you have built up in it.
Etymology
AUTO (automobile) LOAN. A LOAN secured by the AUTO (vehicle) being purchased.
Common Misspellings
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