How Does a Car Loan Work?


With a car loan, the consumer makes a down payment on the car, obtains financing, makes monthly payments on the loan and pays interest on the loan, according to the Federal Trade Commission. Financing can be obtained through a direct lender or the car dealership.

While 20 percent of the car's value is the standard down payment required for financing, making a bigger down payment reduces the amount a consumer has to borrow and the length of the loan, states the FTC. It's best that consumers compare financing options from dealerships, banks, credit unions and finance companies to find the best loan.

Before accepting a financing offer, a consumer should look at his finances to determine how much of a loan he can handle, notes the FTC. Consumers should consider cost of living, bills, savings plans, car insurance, current interest rates and other financial obligations when deciding how much of a loan they can handle. It may be less expensive to lease a vehicle rather than buy it outright.

A consumer should carefully and thoroughly look over financing documents to ensure he understands and agrees with them before signing them, according to the FTC. He should also be aware of the most current federal and state laws regarding car financing to make a more informed decision and negotiate a better deal.