All You Need to Know About Auto Loans
Your auto loan will affect your monthly budget the whole time you have it, so do some research carefully before signing on the line. Here’s all you need to know about auto loans.
How do auto loans work?
When you get an auto loan, you’ll have the funds you need to buy the car in one lump sum, which you’ll pay back a bit of each month, along with interest, over the term of the loan, which generally lasts 5-7 years.
Where do I apply for an auto loan?
There are two main sources for auto loans:
- Direct lenders. This includes financial institutions, like banks and credit unions. You’ll probably have the opportunity to get pre-approved through these lenders, which can make car-shopping a lot easier.
- Dealership financing. This option lets you buy and finance your ride all in one stop. A dealership loan, though, may come with high-pressure sales tactics, a higher interest rate, excessive add-ons or a combination of all these elements.
How high will my monthly payment be?
Your monthly payment amount is determined by several key factors:
- The loan amount. The amount you borrow will be equal to the value of the car you’re purchasing. Lessen the cost by making a sizable down payment or trading in your old vehicle.
- The annual percentage rate. Usually referred to as the APR, this is the effective interest rate you pay on your loan.
- The loan term. The typical length of most auto loans is five years, but some lenders will let borrowers stretch the term to seven years or even longer. A longer-term loan means paying less each month, but it also means paying more in total interest over the life of the loan.
How can I score the lowest interest rate on my loan?
- Shop around for a lender. Get quotes from several lenders to find the one that offers the lowest rate.
- Boost your credit score. In the months before you apply for an auto loan, take steps to boost your credit score, including paying all credit card bills on time, working to pay down outstanding balances and not opening new cards.
- Borrow less than you qualify for. A smaller loan amount generally means a lower interest rate, too.
Use our auto loan guide to make an informed decision about your loan.