One cannot deny the number of conveniences in owning a car. A car can get you anywhere you want, after all. In some instances, a car becomes a necessity. If your workplace is far from your residence, a car can get you there without the hassles you will get from using a public transportation. If you have a fairly large family, owning a car is preferable than commuting when you’re going to the mall or going on a holiday trip.

Though owning one may not be as easy for you and others. Some of the problems may lie on the financial side of life, especially when you do not have the means to purchase the car at its full price in one go. Fortunately, that’s where car loans come in. The concept behind a car loan is that a bank or any financial institution will lend you money enough to buy a car you want, while you pay them in monthly terms with interest.

What is a car loan agreement?

As with anything legally-related, there will be terms and conditions involved, and in this case these terms are included in the car loan agreement. A car loan agreement is defined as a written contract between you and your lender. The lenders are typically banks or other financial institutions.

If you are a first time applicant, the terms included might be a bit overwhelming for you so it is important to research beforehand. This is a big responsibility, mainly a financial one, as you have to keep your end in the contract. Before you sign anything, here are some important items and terms in a car loan agreement:


This term refers to the entity that you owe your money to. In simpler terms, the body that you borrow your money from, like the bank, is called your creditor.


This term refers to the one who owes or borrows the money.


This term refers to the person who signs along the car loan agreement with you to make sure that the debt will be paid. In such cases that you fail to pay the debt, the co-signer is legally responsible in making sure that the terms are met and the debt is paid off.


A default in loaning terms means that the debtor or you, in some way, failed to meet some terms in the car loan. If you fail to pay the debt, you will default on the loan. If you have a secured loan and a default happens, your creditor will claim your pledged collateral as repayment.


This term refers to something you have that should be pledged when you default or fail to pay your loan. There are different types of collaterals that can be given up, such as properties or bank accounts. In secured car loans, typically the car is the collateral.

Secured loans

Secured loans refer to loans that are secured or protected by a collateral. If you pledge your car, house, property or anything of value, then the creditor will be assured that you will do whatever it may take to pay off the loan. As such, having a collateral will reduce the interest rate on the loan.

Unsecured loans

Unsecured loans, on the other hand, means that your creditor will not have the security of having a collateral should you default on the loan. This poses a risk for lenders and banks, so this type of loan typically has a higher interest rate. Lenders can also look at your credit history to know if you can be given an unsecured loan or not.

Credit history

Your credit history refers to a record of your capability to pay off your debts and may contain information which include your credit accounts, the amounts you owe, and if your debts are paid within the right time. This helps the creditors decide whether to lend you money or not.


A delinquent, as defined by the Merriam-Webster dictionary, is used to describe a young person who regularly does illegal or immoral things. In a sense, this term roughly means the same in loaning terms. A delinquent refers to someone who fails to give the payment on time.

This is not to be confused with ‘default’. You’re considered delinquent the moment you fail to pay on time, and when the loan is delinquent for an amount of time, then that’s the time creditor will state the loan as default.

Interest rate

The interest rate refers to the amount or cost that you need to pay your lender to allow you to borrow money from them.

Acceleration clause

This term roughly means that you are required to pay your entire loan balance to your lender instantly.


This term means that you’re paying off your debt in installments over a specified fixed period of time. For example, let’s say that you’re paying off your car loan monthly for five years with a specified interest rate.


This term refers to the amount of money that you still need to pay on the loan, excluding the interests and other additional fees.

Late Fee

Late fee is referred to the amount you need to pay when you fall behind on your car loan payment.

Getting a car is a big decision to make. Having one comes with convenience as much as financial troubles since maintenance, repairs, accessories, and fuel may cost you a fortune. Getting a loan to have a car, though, is an even bigger decision to make. The car you want may be within reach, but you need to remember that this is a long term financial responsibility. Before taking the big leap, be sure that you have the financial capability to pay off the money you borrow. Be very careful and know what you’re getting into. Make sure to review the agreement carefully and make sure you understand the terms and conditions before signing it.