- An auto loan is designed to lend enough money to a borrower for the purchase of a car. Auto loans can be for new or used cars and are also available for recreational vehicles. Borrowers can also decide whether to purchase a car from a dealership or from an individual seller. Applicants decide whether to apply for an auto loan pre-approval through a lender or instead to apply for a loan on site at the dealership after choosing a car. Some lenders send out pre-approvals to existing customers without the customer applying at all; they do this in the hopes that the customer will be compelled to go out and buy a car using the pre-approved auto loan.
- An auto loan is secured by the vehicle. This means that the car is considered collateral for the loan. Since there is collateral for the loan, the interest rate can be lower than for a loan that is not secured by a car. For this reason, most people choose to use a loan specified as an auto loan for car purchases instead of using a personal loan with a higher interest rate. When an auto loan is funded the lender then becomes the lien holder on the car. Even though the borrower is considered the owner of the vehicle, the car is not completely owned by the borrower in full until the loan is paid off.
- While a lender is lien holder on a car the borrower must follow lender specifications and regulations. Most lenders have insurance requirements that must be met as long as the loan is active, and some lenders will not allow cars to be shipped overseas as long as the loan is in place. Borrowers are expected to keep the cars in good working order since the cars are considered collateral for the loan. If payments aren't made then the car can legally be repossessed by the lender, even without the permission of the borrower.
