What is an auto loan?

Car buyers can choose from several types of auto loans to finance their next car purchase. Some are more common than others, but it’s helpful to be aware of the different types of auto loans you may encounter when buying your next car.

The main differences in the type of auto loan are whether the vehicle is used as collateral, how the interest is calculated, and the source of financing. There are also special types of auto loans for special situations.

What is an auto loan?

Auto loans allow you to borrow money from lenders and use that money to buy a car. The loan must be repaid in installments over a certain period of time, and interest will accrue on the money you borrow.

If you have a high credit rating, you will be able to qualify for a lower interest rate, and this will save you money over time. Your credit score will also help you determine your initial loan amount and the down payment you need.

What affects your monthly payments?

Your monthly payments are affected by many factors, including your borrowing amount, interest rates, and loan term. The current interest rate and the amount you need to borrow may be out of your control, but you can be flexible with your loan term. Short loan periods usually increase monthly payments and cost less in interest, while long loan periods usually decrease monthly payments but tend to increase interest over time.

How auto loans work.

There are several types of auto loans, including dealer financing, auto loans from banks or credit unions, and loans from online lenders.

The most appropriate type of loan depends on factors such as credit rating, loan amount and desired vehicle.

Dealer Finance.

Dealer finance is the most easily accessible type of loan because shopping and finance can be done in one place. It looks like the dealer will check your credit. If you have a high credit score, you can get a promotional rate from the manufacturer through an authorized dealer.

But dealer financing tends to come at higher interest rates. This is because dealers often receive commissions or higher rates when they give you financing from a bank or credit union.

A car loan from a bank or credit union.

You can also apply for an auto loan from a traditional bank or credit union. The borrower finances this loan, so you don’t have to go to the dealer. But it may take longer than going to the dealer. We expect a loan from a bank or credit union to take at least one business day and up to a week.

Lenders often list minimum and maximum loan amounts, so make sure the lenders you are looking at provide the amount you need for your new car.

Online auto loans.

You can also apply for an auto loan online. These loans are often processed remotely, but the steps are similar to getting an auto loan from a bank or credit union. It may take as little as one business day for approval.

How long does it take to repay an auto loan?

Depending on your credit rating, income, and loan amount, you can get different auto loans with different repayment terms. Typically, the borrower must repay in monthly installments over a period of one to five years (as agreed upon between borrower and borrower).

However, since many buyers these days are buying more expensive cars, many lenders now offer auto loans with repayment periods of up to 80 months (7 years). Longer repayment periods can reduce your monthly payments compared to short-term auto loans, but because you have to pay more interest overall, you have to pay more interest over the life of the loan.

Can I use a personal loan to buy a car?

Many lenders will only approve car loans for cars of a certain age (usually 5 years or less). Since a car loan is a “secured” type of loan, the car being financed is used as collateral (i.e., if the car loan is not repaid, the borrower can foreclose on the car and sell it to get back some of the money). And because cars get cheaper and cheaper over time, borrowers don’t like to offer car loans on older cars because they may not be able to pay back as much if you can’t repay them.

What should you do? If the car you want to buy is older than the borrower is asking for a car loan, you may want to consider a personal loan to finance the purchase. Personal loans usually require higher interest rates and higher credit scores, but because they are “unsecured,” borrowers cannot use the car as collateral and cannot get it immediately if they cannot repay the loan.