As we grow older, we need to buy things and properties that will be useful to our daily lives. Some of the most significant investments we make are in houses and cars.
Compared to a home, a car may not seem like too significant of a purchase, but it still costs a great deal of money. But of course, these two things are not easily attainable, even with a stable income.
So one option many people use to buy a home or car is to take out a loan. But how similar and different is loaning a car from loaning a house?
Today we will share with you the similarities between loaning a car and loaning a house.
How Are Mortgage And Auto Loans Similar?
Various things make car loans and mortgage loans similar. One of them is, of course, they are both types of loans.
Taking out a loan means that you are receiving or borrowing money from a lender and are contractually obliged to pay the principal, which is the value of what you borrowed. You also pay for other things, such as the interest on the loan.
In a mortgage loan, the principal is the total value of your house or property. In an auto loan, the principal is the full value of your vehicle.
The interest rate is the amount the lender charges the borrower based on the percentage of the principal.
In both mortgage loans and auto loans, you are obliged to pay payments in installments every month. What is included in their monthly payments are principal and interests, but it may also include other expenses.
Especially in the case of a mortgage. With a mortgage, you may have payments that go toward your property taxes, homeowner’s insurance and/or PMI (private mortgage insurance).
Collateral In Mortgage and Auto Loans
Another similarity between these two types of loans is that they use the property purchased by the borrower as collateral. This means the lender can claim the item purchased by the borrower if the borrower does not follow the contract they are obliged to.
Collateral is something pledged as security to the lender for loan repayment. In the event of a default, the collateral can be claimed by the lender.
For example, Sara takes out an auto loan to purchase a car. Because she qualified in the underwriting process, Manny, the lender, agreed to lend her a certain amount of money to buy a car within the budget Sara could pay every month.
The amount of money lent by Manny is based on Sara’s financial status presented in her financial documents. Sara is obligated to pay a certain monthly amount to repay her debt to Manny.
However, after six months, Sara stopped paying Manny even though the contract was not yet closed. In cases like this, Manny can claim collateral, which in this case is the car Sara bought using Manny’s money. If this situation were applied to a mortgage, then the lender, in that case, would also be able to claim collateral.
So, principal value, interest, and collateral are all elements auto loans and mortgages have in common.