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How do auto loans function? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial decisions by providing you with interactive tools and financial calculators that provide objective and original content. This allows you to conduct research and compare information for free - so that you can make informed financial decisions. Bankrate has agreements with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this site are from companies that pay us. This compensation could affect how and when products are featured on the site, such as for instance, the order in which they may appear within the listing categories and other categories, unless prohibited by law. Our mortgage or home equity, and also other home lending products. However, this compensation will affect the content we publish or the reviews that you see on this site. We do not cover the vast array of companies or financial offers that may be accessible to you.



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3 min read Published on August 03, 2022.
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Written by Bankrate Written by

This article was written using automation technology and thoroughly verified and edited by an editor on our editorial team.







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

Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers to take control of their finances with clear, well-researched information that breaks down otherwise complex topics into digestible chunks.







Reviewed by Mark Kantrowtiz 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, education tax benefits and student loans.









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An is a type of financing that allows you to purchase a vehicle using borrowing money from a lender. The loan is then paid back in a predetermined time frame, usually two to seven years. The monthly payment amount can be calculated based on the loan size, interest rate and duration. What is the way auto loans work Approval for a vehicle loan is the same way as other types of financing. The lender examines, evaluates and reviews the credit rating and your financial circumstances and evaluates your creditworthiness on the basis of various aspects. The lender will need proof that you can afford the vehicle as well as have an adequate sources of revenue. Most of the time this would mean that you have a job with a steady income and a minimum credit score that differs by lender but there are exceptions. Even if you have a good credit score, the lender will look at other factors to determine if you're a qualified applicant for an automobile loan. Once you are approved and the lender offers you with a car loan, you will make monthly payments over a set schedule for 24 to 84 months. Amounts of auto loan sums The quantity you can borrow to buy a car is determined on your income per month and expenses as well as your credit score and the amount of debt you carry. The amount you borrow will also determine the amount you are able to manage to afford. If you are shopping for a $40,000 vehicle, as an example, but only get approved for $35,000, a $5,000 down payment would put you in a position in which you are able to purchase that vehicle. Auto loan rates of interest The interest rate on your vehicle loan is dependent upon the credit rating of your score as well as loan duration and the amount as well as lender. The best rates go to those with excellent to excellent credit scores -- typically a score of 740 to 850. If you're interested in getting the most competitive rate, review your credit report and request corrections if required. Corrections should be requested at least 30 days before you intend to apply -which allows. Also, you should have minimum three lending institutions rather than going straight to the dealer. This will help you secure an excellent deal. The terms of your auto loan terms The term of your car loan affects your monthly payment and how much interest you pay in total. The shorter the duration will be, the greater your monthly payments will be -- but you'll also be paying less interest since it's likely to take less time to accumulate. The majority of auto loans are for a term between two and seven years. For instance, a $20,000 loan with a 5-year term with a 3-percent interest rate, you would pay $1,562 total interest paid. A similar amount, and the same rate in a three-year term would be just $938 for total interest. Auto loan payoff The payoff process is straightforward. It is a matter of making regular monthly payments until you've paid the entire amount of your auto loan. After it's completely paid off and you've received the title to the car. It is possible to add to the loan prior to the time it is completed if you're able to get a better rate of interest, however this isn't a guarantee. Terms of an auto loan terms to be aware of It is important to know the various components of an auto loan. Understanding these terms and the meaning they mean will allow you to better understand the loan and the terms you're signing on when you go to finance your vehicle. The term "loan" simply means how long you'll be responsible for the loan. The longer the loan term the higher the cost of your loan will ultimately be due to the accrual of interest. It's sometimes called the loan time or repayment term. Interest rate: This is the amount that you will be charged for borrowing funds, but it does not include charges. APR Annual percentage rate (APR) represents the interest rate you'll be charged for borrowing money, including fees. It also accounts for the term of the loan. The down payment is the amount in cash that you pay upfront when you purchase the vehicle. It's suggested to put down a deposit that is 20% of the cost. The amount you finance The amount you borrow, and it's usually based on your income and ability to repay the loan. This is also known in the form of"the loan amount. Monthly payment: The monthly installment is exactly what it sounds like: the amount you pay toward the loan every month. It's determined by the term of the loan, amount and interest rate. Total cost: Once you factor in the loan amount as well as the interest over the duration of the loan and you'll have the total amount of the loan. Direct or. dealership financing There are two major ways to finance a car -- directly through a bank, credit union or online lender or via the dealership. The latter, sometimes referred to as a "bank loan," is when you request financing with a bank, credit union or online lender without having to go through a dealership. is when a dealership works with an lender to provide you with financing. The dealer forwards your details to a number of partners, who then offer credit based on the information it receives back. While it's convenient however, dealer financing tends to be more expensive in comparison to straight financing. There's usually an added cost to the interest rate for the loan -- an amount that the dealer takes. Following steps: Understanding how auto loans operate and the different types of loans can assist you in making an informed decision when you're ready to purchase a car. With a bit of planning you might be able save money. Find out more


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Written by

This article was generated by using automated technology. It was then thoroughly verified and edited 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 since the end of 2021. They are passionate about helping readers gain the confidence to control their finances by providing precise, well-researched and clear data that parses complicated topics into bite-sized pieces.






Auto loans editor


Reviewed by Mark Kantrowtiz Reviewed by Nationally recognized student financial aid expert

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






Nationally acknowledged expert in student financial aid




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