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3 min read Published August 03, 2022
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Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since the end of 2021. They are dedicated to helping their readers gain the confidence to take control of their finances with clear, well-researched information that breaks down complicated topics into manageable bites.







Review by Mark Kantrowtziz. Reviewed by Nationally acknowledged expert on student financial aid

Mark Kantrowitz is an expert on student financial aid, the FAFSA as well as 529 plans, scholarships as well as tax benefits for education and student loans.









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An approach to financing that permits you to purchase a vehicle using borrowing money from an lender. A loan is then paid back over a set period, usually two to seven years. The amount of the monthly installment will be determined by loan size, interest rate and term. How auto loans work Approval for a vehicle loan is like other forms of financing. The lender reviews , assesses your credit score and financial situation , and evaluates your creditworthiness on the basis of various factors. The lender will need proof that you are able to afford the vehicle as well as have an adequate source of income. In the majority of cases, this means you must be employed with an income that is steady and a minimum credit score that varies by lender, although there are exceptions. Even if you have a good credit score, the lender will consider other factors to determine if you're a suitable candidate for an auto loan. If you're approved and the lender offers you with a car loan that you pay monthly installments on a predetermined schedule for 24 to 84 months. The amount of auto loan sums The quantity you are able to borrow for a car is based on your monthly income and expenses as well as your credit score and your debt load. It also influences how much you can manage to afford. If you're looking for a vehicle worth $40,000 for example, but can only be approval for $35,000, then a $5,000 down payment could place you in a position in which you are able to purchase that car. Interest rates on auto loan rates Interest rates The rate at which you pay for your vehicle loan is dependent upon your credit score, loan duration and the amount as well as lender. The most favorable rates are for those with excellent to excellent credit scores, typically 740 to 850. If you want to get the best rate, check your credit report and make corrections, if necessary. Corrections should be requested at least 30 days in advance of the date the date you're planning to applywhich permits. You should also with at least three lenders, rather than going straight to the dealer. This will help you secure a good bargain. Auto loan terms The term of your car loan affects your monthly payment and the amount of the interest you are charged in total. The shorter the loan term will be, the greater your monthly payment will be and you'll pay less interest because it's likely to take shorter time to accrue. Most car loans are for a period between two and seven years. Take, for example the case of a $25,000 loan with a five-year term with a 3-percent interest rate would result in the total amount of $1,562 in interest. Similar amount with the exact rate on a 3-year term would be $938 in total interest. Pay off of your auto loan payoff The payoff process is easy. It is a matter of making regular monthly payments until you've paid the entire amount of the car loan. Once it's fully paid off you'll receive the title of the car. You may also be able to pay off the loan prior to the time it is completed if you're in a position to obtain a lower rate of interest, however this isn't a guarantee. Terms of an auto loan terms to be aware of It's important to understand the various components of the auto loan. Knowing these terms and what they mean will help you better understand the product and what you're signing off on when you go to finance your car. Loan term: This simply is the length of time you will be paying back the loan. The longer the loan term is, the more costly your loan will be in total because of the interest accrual. It's sometimes called the loan period or repayment term. Interest rate The interest rate is the amount that you will be charged for borrowing funds, but it does not contain charges. APR The annual percentage rate (APR) refers to the rate at which you will be charged to borrow the money, including fees. It also takes into account the duration of the loan. The down payment is the cash amount that you pay upfront when you buy the car. It's suggested to put down a deposit that is 20% of the total cost. The amount you finance is the amount you're borrowing, and is typically based on your income and ability to repay the loan. This is also known in the form of"the loan amount. Monthly payment: Your monthly payment is exactly what it sounds like that is the amount you pay toward the loan each month. It is based on the term of the auto loan as well as the amount and rate of interest. Total cost: When you take into account the loan amount as well as the interest that is paid over the course of the loan, you will have the total amount for the loan. Direct financing vs. dealers financing Two main ways to finance a car either directly through a bank, credit union or online lender or through the dealership. Also known as a "bank loan," is when you apply for financing through a bank credit union, or online lender without going through a dealership. is when a dealership works with an lender to provide the financing. The dealer will send your details to a number of partners, who then offer financing based on what it receives back. Although it is convenient the dealer's financing can be more costly than direct financing. There is often an additional charge added to the interest rate for the loan and which is a percentage that the dealership is paid. Next steps Understanding how auto loans work and the several types of loans can assist you in making an informed decision when you're looking to buy an automobile. And with a little planning you might be able to save money. Find out more


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This article was written using automation technology and thoroughly checked for accuracy and editing by an editor on our editorial team.



The edit was done by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers gain the confidence to control their finances through providing precise, well-researched and clear information that breaks down otherwise complex subjects into digestible pieces.






Auto loans editor


Review by Mark Kantrowtziz. Reviewed by Nationally known student expert on financial aid

Mark Kantrowitz is an expert on student financial aid, the FAFSA, scholarships, 529 plans educational tax benefits, student loans.






Nationally acknowledged expert in student financial aid




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