What is an Auto Loan?
An auto loan is a financial product that allows individuals to borrow money to purchase a vehicle. The loan is typically secured by the vehicle itself, meaning that if the borrower fails to make payments, the lender can repossess the car. Auto loans are a popular way to finance a vehicle purchase in the United States, as they allow buyers to spread the cost over several years, making it more manageable.
How Auto Loans Work
Auto loans provide the borrower with a lump sum of money from the lender to purchase a vehicle. The borrower then agrees to repay the loan amount, plus the interest on the borrowed amount, over a specified period, usually ranging from 36 to 72 months, but sometimes up to 96 months. These days auto loans are widely available from banks, credit unions, and other sources.
The interest rate can be fixed or variable, and it significantly affects the total cost of the loan. Your credit score can play a major role in the interest rate you will have to pay. Loan rates are also affected by such factors as the size and length of the loan and the value of the car.
Monthly payments are calculated based on the loan amount, interest rate, and loan term. The longer the loan term, the lower your monthly payments may be, but the more you’ll pay in total by the time the loan ends.
Many lenders will pre-qualify you for a loan. That can be helpful in comparing different loan offers side by side. Some auto loans require no down payment, but experts of auto loans often recommend making a down payment of 10% to 20% of the car’s value. That will reduce the amount you have to borrow as well as the interest you’ll pay over the course of the loan. Some lenders may also offer you a lower interest rate in return for a higher down payment.
What Factors You Should Consider When Getting an Auto Loan
- Principal. The principal is the amount of money you’re borrowing. Lenders will use this figure to calculate your interest and fees. In a typical amortized auto loan, each of your monthly payments will pay off a portion of the principal along with interest.
- Interest Rate: The interest rate determines how much extra you will pay over the life of the loan amount. A lower interest rate means lower total costs.
- Loan Term: The length of the loan affects your monthly payments and the total interest paid. Shorter terms have higher monthly payments but less interest. To lower your monthly payments you can request for a longer loan term but you will pay more in total over the life of the loan.
- Down Payment: A larger down payment reduces the loan amount and can lead to better loan terms.
- Credit Score: Your credit score influences the interest rate and loan approval. The higher your credit score the more likely you will be to receive loan offers with good interest rates.
- Total Loan Cost (APR): Consider the total cost of the loan, including fees and interest, not just the monthly payment. APR includes any and all other fees and costs associated with the loan. To fairly compare different loans, use their APRs.
- Prepayment Penalties: Check if there are penalties for paying off the loan early. Some lenders charge prepayment penalties if you pay the loan back before the date it would normally have come to an end.
- Lender Reputation: Choose a reputable lender with good customer service.
What Types of Auto Loans Are Available
You can get an auto loan for a new car or used car. The interest rate for a used car loan is typically higher than one for a new car. For example, the average APR for used car loans was recently 11.6%, compared to an average of 7.1% for new car loans.
- Secured Auto Loans: These loans use the vehicle as collateral. They typically offer lower interest rates.
- Unsecured Auto Loans: These do not require collateral but often have higher interest rates.
- Simple Interest Loans: Interest is calculated on the remaining balance, which can save money if you pay off the loan early.
- Precomputed Interest Loans: Interest is calculated upfront, and you pay the same amount regardless of early repayment.
What Are the Requirements to Get an Auto Loan in the United States
To secure an auto loan in the U.S., you typically need:
- A valid driver’s license
- Proof of income (pay stubs, tax returns)
- Proof of residence (utility bills, lease agreement)
- A good credit score (varies by lender)
- A down payment (amount varies)
- Vehicle information (make, model, VIN)
What Credit Score You Need to Buy a New Car
For a new car, a credit score of 661 or higher is generally considered good and can qualify you for favorable loan terms. However, some lenders may offer loans to individuals with lower scores, though at higher interest rates.
What Credit Score You Need to Buy a Used Car
For a used car, a credit score of 600 or higher is typically sufficient to secure a loan, though better scores will yield better terms. Lenders may be more flexible with used car loans, but interest rates can be higher than for new cars.
Can you get an Auto Loan with No Down Payment?
You do not need to make a down payment to qualify for many auto loans, but you can expect the interest rate to be higher if you decide to finance the entire purchase.
Also in most cases, you need an excellent or very good credit score to qualify for an auto loan with no down payment.
7 Tips to Secure the Best Auto Loan for You
- Check Your Credit Score: Know your score and work to improve it before applying. Pay your bills on time, lower your credit utilization ratio and keep your oldest accounts open.
- Shop Around: Your first loan offer isn’t necessarily the best. You can get pre-approved for multiple loans and compare your options. Compare offers from multiple lenders to find the best rates.
- Get Pre-Approved: Secure a loan offer before visiting the dealership to strengthen your negotiating position. Best ways is to get an auto loan from your banking institution if possible as they will be able to provide you the best interest rates and loan tems.
- Negotiate Terms: Don’t just focus on the monthly payment; negotiate the interest rate and loan term. You may be able to negotiate your loan’s APR and/or fees, especially if you have strong credit. It is always worth asking lenders for better terms.
- Consider Total Loan Cost: Look at the total cost of the loan, including interest and fees.
- Avoid Long-Term Loans: While they lower monthly payments, they increase total interest paid.
- Read the Fine Print: To avoid unpleasant surprises down the road, make sure you understand all of the loan provisions and fees before you sign the loan agreement. Understand all terms and conditions, including fees, monthly payments, insurance requirements, total amount of loan to be paid back and penalties.
What Are the Dealership Fees You Should Not Pay
- Advertising Fees: Often unnecessary and negotiable.
- Dealer Preparation Fees: These are often inflated and can be negotiated.
- VIN Etching Fees: This service can be done independently for less.
- Extended Warranties: Consider if they are necessary and if they can be purchased elsewhere for less.
Top 10 Best Banks to Get an Auto Loan for Excellent Credit
- Bank of America
- Chase
- Wells Fargo
- US Bank
- PNC Bank
- Capital One
- Ally Bank
- LightStream
- SunTrust Bank
- TD Bank
Top 10 Best Banks to Get an Auto Loan for Bad Credit
- RoadLoans
- Capital One
- Carvana
- Auto Credit Express
- MyAutoLoan.com
- LendingTree
- BlueSky Auto Finance
- CarFinance.com
- DriveTime
- OneMain Financial
What Are the Alternatives to an Auto Loan
Getting an auto loan is the right choice in many cases, but there are alternatives you can consider. It is possible to purchase a car with cash, of course, if you can come up with the money. You can also explore the possibility of buying a car on a personal loan or leasing it.
Summary
Securing an auto loan involves understanding how loans work, considering various factors, and choosing the right type of loan for your needs. By improving your credit score, shopping around, and negotiating terms, you can secure the best loan possible. Be wary of unnecessary dealership fees and choose a reputable lender that suits your credit profile.
Frequently Asked Questions
Q1: Can I get an auto loan with no credit history?
A1: Yes, but it may require a co-signer or result in higher interest rates.
Q2: Is it better to finance through a bank or dealership?
A2: Banks often offer better rates, but dealerships may provide more convenience.
Q3: Can I refinance my auto loan?
A3: Yes, refinancing can lower your interest rate and monthly payments if your credit score has improved.
Q4: How does a down payment affect my auto loan?
A4: A larger down payment reduces the loan amount, potentially leading to better terms and lower interest rates.