What Is an Auto Loan?

An auto loan is a specific loan type for automobiles. It’s a secured loan strictly tied to the car you just purchased, and it’s designed to help you pay for a car you can’t afford to pay for outright. It’s a secured type of loan, which means if you miss a car payment, your car might be impounded. Car loans are offered by private institutions such as banks, financial institutions, or car dealerships directly. Based on the lender, the interest rates will vary wildly. Getting an auto loan is far more flexible than other types of secured loans such as mortgages – as the fees and interest rates are smaller.

Depending on the car you like and the amount of money you need, the interest rates will vary. A good way to lower your monthly installment is by providing a downpayment on your car. That is a preset amount of money you can afford to give the lender to reduce interest rates, overall payments, and other fees associated with getting a new or used car. If you’re going to get a car for the first time, understanding auto loans will be essential.

Unlike payday loans, most of the interest rate and APR will reside on your credit score. The better your credit score, the better deal you’ll be eligible for. Getting the best deal on your auto loan will require a good credit score, a proper lender, and a financially conscious car choice. You don’t want to get a car that you can’t afford to pay for. Approval rates depend heavily on your credit score, so having a proper one will help in the overall loan application process. Aside from your credit score, you’ll need to have a light debt load. If your debt load is significant, you might not be approved for an auto loan.

PRO Tip
Auto loan lenders use a DTI to determine if you’re eligible for a loan. The debt to income ratio checks if you’re eligible to meet your payments. Make sure to get your finances in order before you get an auto loan.

The Types Of Auto Loans

There are a lot of different auto loans. Most of these differences are based on the lender. Below, we’ll explore every different type of auto loan.

Unsecured & Secured

Unsecured auto loans are not tied to any collateral, such as your car. Banks and financial institutions most often offer these types of loans. Secured auto loans are tied to your car as collateral, and are offered by auto dealerships.

Bank & Dealership

Depending on the lender, the rules will change. While a dealership might offer better or no interest rates, banks can offer unsecured loans that are not tied to your collateral. Depending on your budget, you’ll want to make a different choice.

Used Car & New Car

Depending on the car itself, the fees and interest rates will vary, just like the overall price. Used cars are usually more consumer-friendly, as they have lower interest rates, APR, and other determining price factors.

Lease & Loan

Loans are predetermined amounts of money offered to you to purchase a vehicle. On the other hand, a lease allows you to borrow the car from the dealership for a predetermined amount of time. When that time passes, you can either purchase the car or return it to the dealership.

What are the Interest Rates and Fees on Auto Loans?

Unlike most other types of loans, auto loans have a lot more fees placed on them. The standard interest depends on the type of lender, but it usually doesn’t pass the 5%. The APR and interest will depend on your credit score, so having a better score can get you a better deal. There are also 0% interest fees, but you’ll have to apply for them. Auto dealerships mostly offer these types of fees. Besides the standard loan tax, you’ll have to take the following taxes and fees into consideration.

  • Sales tax
  • Title and registration fees
  • Car insurance fees
  • Dealership fees
  • Trade-in value
  • Documentation fees
  • Repayment fees
  • Leasing fees

The fees on auto loans can be quite high, so it’s important to cut them down as well as possible. That is best done through getting your finances in order, resolving your credit score, putting in a downpayment, and considering a trade-in. Doing these things will significantly cut down on APR, interest rates, and ultimately provide more worth to your car loan.

PRO Tip
Car loans can get quite expensive. You’ll need to do your best to decrease the fees as much as possible. Missing car payments can be disastrous, so make sure to make a conscious, budget aware decision.

What are the Pros and Cons of Auto Loans?

Auto loans aren’t the cheapest thing in the world, and you’ll have to account for a lot of fees. As long as you make a decision that fits your budget, all you need to do is find a loan that fits you, your needs, and your finances well. These types of loans usually come with more benefits than disadvantages, which we will list below.

Auto Loan Advantages

  • Multiple options
  • Multiple lenders
  • Credit score based
  • Loan and leasing options
  • 0% interest rape possibility
  • Competitive market

Auto Loan Disadvantages

  • Multiple fees
  • Debt to income requirement
  • This could lead to impounding

Bottom Line

Car loans are a fantastic way to get a car now and pay for it later. While they do have a lot of fees associated with them, as long as you plan your budget and have a decent credit score, having a car loan will be very beneficial.

Frequently Asked Questions