The Complete Auto Loan Guide

An auto loan is simply borrowed money repaid in fixed monthly installments with interest, but small differences in rate and term change the total cost of an auto loan dramatically, which is exactly what this auto loan guide walks through next.

The moving parts of every auto loan

• Principal: the amount financed, vehicle price minus down payment and trade-in.
• APR: your annual interest rate, driven mainly by credit score, loan term, and new vs. used status.
• Term: how many months you finance for, commonly 36-84 months.
• Monthly payment: calculated from the three factors above using a standard amortization formula; see our Auto Loan Calculator.

Where to get an auto loan, ranked by typical cost

1. Credit unions often offer the lowest rates, especially for existing members.
2. Banks and online lenders are competitive and useful for pre-approval to compare against a dealer’s offer.
3. Dealership financing can be competitive when manufacturers subsidize rates (0-2% promotional offers), but otherwise often carries a markup over what the lender actually charges the dealer.

How term length changes total auto loan cost

A longer term lowers your monthly payment but increases total interest paid and extends the period where you may owe more than the car is worth. As a general guideline, avoid financing longer than 60 months unless the rate is unusually low (such as a 0% promotional offer), and never finance longer than you plan to keep the car.

What lenders look at

Credit score is the dominant factor, but lenders also weigh your debt-to-income ratio, employment history, and the loan-to-value ratio (how much you are borrowing relative to the car’s worth). A larger down payment improves your loan-to-value ratio and can help you qualify for a better rate even with a middling credit score. The FTC’s guide to vehicle financing explains your rights when shopping for an auto loan, a good complement to the rest of this auto loan guide.

What happens if you fall behind on payments

An auto loan is secured debt, the car itself is the collateral, and the lender holds a lien on the title. Once a loan is in default, most state laws allow the lender to repossess the vehicle without a court order and often without advance warning. Repossession does not end the debt: after the lender sells the repossessed vehicle, usually at a wholesale auction for less than retail value, the borrower is typically still responsible for the “deficiency balance,” the gap between what was owed and what the sale recovered, plus repossession and sale costs. If you know a payment is going to be late, calling the lender before the due date, not after, is the most effective move, since lenders generally have far more flexibility to offer before an account is delinquent.

Add-on products that get rolled into your loan balance

Extended warranties, GAP insurance, credit life and disability insurance, and prepaid maintenance packages are often offered at the point of financing, and dealers commonly offer to simply add the cost to the loan. That convenience has a real cost: financing a few thousand dollars of add-ons over a five- or six-year loan means paying interest on that amount for the life of the loan, on top of whatever markup is already built into the product’s price. GAP insurance is the add-on most worth genuine consideration when your down payment is small or your term is long, but it is often available for less through your regular auto insurer as a policy rider than through the dealership’s financed version.

Simple interest vs. precomputed interest: why the loan type affects what early payoff saves

Nearly all mainstream auto loans use simple interest, where interest accrues on whatever principal remains, so an extra payment applied directly to principal, or an early payoff, immediately shrinks the base future interest is calculated on. A precomputed interest loan, sometimes using a Rule of 78s calculation, works differently: the lender calculates total interest for the full term upfront and front-loads more of it into earlier payments, so paying it off early still saves something, since unearned interest is typically rebated, but meaningfully less than a simple interest borrower would save. Precomputed loans are less common than they once were and are restricted in some states, but they still turn up more often with buy-here-pay-here dealers and some subprime lenders than with banks or credit unions.

The loan type is not always obvious from the monthly payment alone, since two loans with the same rate, term, and amount can look identical while treating early payoff very differently. Ask the lender directly which type applies, and request a full amortization schedule before signing, a simple interest loan’s schedule shows the interest portion of each payment steadily shrinking, while a precomputed loan’s contract shows the total finance charge fixed and added to principal from day one.