How Auto Loans Work
An auto loan is a secured loan where the vehicle serves as collateral. Monthly payments are calculated using the same amortization formula as other installment loans. Your payment covers both principal and interest, with more going toward interest in early payments.
New vs. Used Car Rates
- New cars: Typically 4-7% APR for good credit, sometimes 0% promotional rates from manufacturers
- Used cars: Usually 1-2% higher than new car rates, typically 5-10% APR
- Credit score impact: Excellent (750+): 4-5%, Good (700-749): 5-7%, Fair (650-699): 7-12%, Poor (<650): 12-20%+
How to Get a Better Rate
- Improve credit score: Even a small improvement can save thousands
- Larger down payment: Reduces the loan amount and shows lender commitment
- Shorter loan term: 36-48 months usually has lower rates than 72-84 months
- Shop multiple lenders: Compare banks, credit unions, and dealer financing
- Get pre-approved: Know your rate before visiting the dealership
The True Cost of a Longer Loan
While longer loan terms (72-84 months) lower your monthly payment, they significantly increase the total interest paid. A $35,000 car at 6.5% costs $4,072 in interest over 48 months, but $7,853 over 84 months — nearly double.
Frequently Asked Questions
Should I put money down? Yes. A 20% down payment is ideal. It reduces your loan amount, can get you a better rate, and prevents being "upside down" (owing more than the car is worth).
Is sales tax included in the loan? Usually yes — most buyers finance the sales tax as part of the loan. Some states don't charge sales tax on vehicles (Montana, Oregon, New Hampshire, Alaska, Delaware).
Can I pay off my auto loan early? Most auto loans allow early payoff without penalties. Check your loan agreement for prepayment penalty clauses.