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3 min read published August 03, 2022.
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At Bankrate we ensure the accuracy of our content seriously. "Expert verified" means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. Its Review Board comprises a panel of financial experts whose objective is to ensure that our content is always neutral and fair. The reviewers make us accountable for releasing high-quality and trustworthy content.
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This article was written using automation technology and thoroughly edited and fact-checked by an editor from our editorial staff.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers feel confident to manage their finances by providing clear, well-researched information that breaks down otherwise complex topics into manageable bites.
Reviewed by Mark Kantrowtiz Reviewed by Nationally known student financial aid expert
Mark Kantrowitz is an expert on student financial aid including the FAFSA as well as scholarships, 529 plans, education tax benefits and student loans.
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who ensure everything we publish will ensure that our content is reliable, honest and trustworthy. Our loans editors and reporters concentrate on the areas that consumers are concerned about most -- the various kinds of lending options and the most competitive rates, the top lenders, how to pay off debt and more . This means you'll feel safe investing your money.
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An is a type of financing that permits you to purchase a vehicle using borrowing money from a lender. This loan is then repaid over a set period typically between two and seven years. The amount that is due each month is determined by the loan size, the interest rate and duration. How auto loans operate Approval for a vehicle loan is the same way as other kinds of financing. The lender reviews , assesses the credit rating and your financial circumstances and decides on your creditworthiness based upon various aspects. The lender will require evidence that you are able to afford the vehicle as well as have a reliable sources of revenue. In most cases this would mean that you be employed with regular income and a minimum credit score that differs by lender however there are exceptions. Even having a great credit score and a good credit score, the lender will take into consideration other aspects to determine if you're a suitable candidate for an auto loan. After you have been approved, and the lender issues you with a car loan and you make monthly installments on a predetermined schedule of between 24 and 84 months. Auto loan amounts The amount you can borrow to buy a car is determined on your monthly income and expenses, your credit score and the amount of debt you carry. The amount you borrow will also determine the amount you can pay for. If you're looking for a vehicle worth $40,000 for instance, and you only be accepted for $35,000. A $5,000 down payment would put you in a position in which you are able to purchase the vehicle. Auto loan interest rates The rate at which you pay for your vehicle loan depends largely on the credit rating of your score as well as loan length and amount, as well as the lender. The highest rates are offered to borrowers with very good to excellent credit -- typically a score of 740 to 850. If you want to get the most competitive rate, review your credit report and request corrections, if necessary. Corrections must be made within 30 days prior to the date you plan to applyThis gives you time to apply. You should also with minimum three lending institutions, instead of going directly to the dealership. This will ensure you get the best deal. The terms of your auto loan terms The of your car loan impacts your monthly installment and the amount of interest you have to pay. The shorter the duration is, the more expensive your monthly payment will be -- but you'll also pay less interest, because it's likely to take less time to accrue. The majority of auto loans are for a period between two and seven years. Take, for example the case of a $20,000 loan with a 5-year term and a 3 percent interest rate would result in an interest rate of $1,562 per year. A similar amount, and the same rate in a 3 year term would be $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 off the full amount of the car loan. Once it's fully paid off you'll receive the title of the car. You might also be able to apply to the loan before it's completed if you're in a position to obtain a lower rate of interest, however this process is not guaranteed. Terms of an auto loan terms to know It is important to know the elements that comprise an auto loan. Understanding these terms and what they mean will allow you to better understand the product and the terms you're signing on when you finance your car. The term "loan" simply refers to how long you will be paying back the loan. The longer the period, the more expensive your loan will be in total due to interest accrual. This is sometimes referred to as the loan period or repayment term. Rate of interest: The interest rate is the amount that you will be charged when borrowing money, however it does not include charges. APR APR is the annual percent rates (APR) represents the interest rate you'll be charged for borrowing the amount, including fees. It also accounts for the term that you take out the loan. Down payment: This is the cash sum that you will pay at the time you purchase the car. It's suggested to put down a deposit that is 20 percent of the total cost. Amount that you can finance: This is the amount you're borrowing, and is typically based on your income and your ability to pay back the loan. It's also referred to by the loan amount. Monthly payment: Your monthly payment is exactly as it sounds: the amount you have to pay towards the loan each month. It's based on the term of the auto loan in terms of amount, interest rate and amount. Total cost: When you factor in the loan amount and the interest that is paid over the course of the loan then you'll be able to calculate the total amount for the loan. Direct vs. dealer financing. There are two main ways to finance a vehicle either directly through the bank, credit union or online lender or via dealerships. The latter, sometimes referred to as"bank loan, "bank loan," is when you apply for financing with a bank, credit union or online lender without going through a dealership. is when a dealership works with a lender to provide you with the financing. The dealer will send your details to a variety of partner lenders and will offer the financing based on the information it receives back. Although it is convenient however, dealer financing tends to be more costly in comparison to straight financing. There's usually a mark-up added to the interest rate you pay for the loan and which is a percentage that the dealership takes. Next steps Understanding the way auto loans work and the several kinds of loans can aid you in making an informed decision when it's time to buy an automobile. And with a little planning, you may even be able to save more cash. Learn more
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Written by
This article was written by using automated technology. It was then 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 writing and editing for Bankrate since late 2021. They are passionate about helping readers gain confidence to take control of their finances through providing concise, well-studied information that breaks down otherwise complex subjects into digestible pieces.
Auto loans editor
Reviewed by Mark Kantrowtziz Reviewed by Nationally recognized student expert on financial aid
Mark Kantrowitz is an expert on financial aid for students, the FAFSA as well as 529 plans, scholarships as well as tax benefits for education and student loans.
Nationally recognized student financial aid expert
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