Full Guide to Auto Loans (2023) – Automoblog

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Compare which options fit your budget, credit score, and term length below.
*All APR figures last updated on 3/2/2023 – please check partner sites for latest details. Your rate may vary based on credit score, credit history, and loan term.
There’s a lot to consider when taking out a loan to purchase or refinance a car. Even if it seems like a good time to buy a vehicle, it’s easy to forget some steps when moving through the loan application process. Our team has assembled this guide to auto loans to help you better understand the car financing world so that you can secure the best auto loan rates.
Most auto loans are secured loans, meaning they’re backed by real property, known as collateral. Car loans, whether they’re used to purchase or refinance new or used vehicles, are some of the most common loans taken out from financial institutions. Note that auto loans typically have far lower interest rates than credit cards or personal loans.
Annual percentage rates (APRs), which include the loan interest rate plus any added fees, can sometimes be as low as 3%. These rock-bottom rates are only available to those with excellent credit, so most drivers will receive higher APRs. The average auto loan rate is currently 4.33% for new cars and 8.62% for used cars, according to Experian’s State of the Automotive Finance Market Q2 2022 report.
Auto loan terms can range anywhere from 12 to 84 months. Buyers should approach 84-month loans with extreme caution, as they often come with low monthly auto loan payments but high interest rates. You’ll likely be paying for your vehicle beyond its best years and could easily end up underwater on your new car.
Lenders offer a variety of financing options to help borrowers purchase or refinance cars. Here’s a quick breakdown of the different types of auto loans:
Understanding the terms used by auto lenders can help you navigate the process of applying for and securing an auto loan. People often use interest rates and APRs interchangeably, but there are subtle differences between the two.
Interest rates refer to the actual percentage of interest a lender charges you to borrow money. APRs include the base interest rate, but also factor in any added fees. Due to this distinction, you’ll get a more accurate measure of how much you’ll actually pay by looking at the APR.
Auto loans carry different interest rates depending on the borrower and the lender. When you apply for a car loan, lenders look at the following metrics to determine the APR you’ll pay:
Any guide to auto loans should mention that those with a high DTI ratio should consider working to lower their debts before purchasing a new vehicle. Similarly, those who’d need a 72- or 84-month car loan may be better off remaining out of the market if possible.
Credit scores also factor heavily into the calculation of auto loan interest rates. Borrowers with excellent credit usually have an easier time securing loans with competitive APRs, while those searching for bad credit car loans pay significantly more in interest.
Most lenders use FICO credit scores as they evaluate potential borrowers, though some prefer to use scores from Vantage. Each standard gives scores between 300 and 850, with borrowers fitting into one of the credit bands listed below.
You’ll find a variety of costs and fees associated with almost any auto loan. Although not all car lenders charge the same fees, the ones outlined below are extremely common:
It’s also a regular occurrence for lenders to charge fees for late or returned car payments. In rare cases, lenders could charge fees for paying online or with a credit card.
It’s relatively easy to apply for a car loan, especially when you follow this guide. Rather than having to go to a dealership or a bank, you can now fill out a car loan application on your computer or smartphone.
Before beginning the loan application process, you need to know exactly what your budget is. Allotting 10% or less of your take-home pay to your combined car expenses is a good idea. This number should include your auto loan, car insurance, gas expenses, and repair costs. Many car lenders offer auto loan calculators to help you learn how much you can afford.
You can secure an auto loan from a variety of places depending on minimum loan amounts. Different lending options bring distinct advantages and downsides, so it’s best to fully explore your options. Here are a few common types of auto lending institutions:
Make sure to only reach out to reputable lenders when you’re looking to finance or refinance a vehicle. While our guide to auto loans can walk you through the standard process, it’s important that you find a legitimate lender or your information could fall into the wrong hands.
You’re likely to encounter the terms “preapproved” and “prequalified” as you navigate the world of auto loans. There are similarities between these terms, but plenty of differences as well.
Being prequalified means you’ve received an estimate for how much you can borrow from a financial institution. There’s no firm loan offer attached here; it’s a quote rather than a commitment from a lender. Financial institutions use soft credit checks for prequalification, so your credit score won’t be affected.
To get preapproved for an auto loan means that a lender has done a hard credit pull and made a firm loan offer to you. Your credit score could temporarily dip if you apply for preapproval from multiple lenders over a few weeks. However, securing preapproval gives you leverage when negotiating with a dealer by making you similar to a cash buyer.
Along with comparing rates from multiple lenders and doing whatever you can to raise your credit score, here are some strategies you can use to get the best deal on an auto loan:
When you’re looking for the best reasonable auto loan rates, always do your research and consider offers from multiple lenders.
It’s relatively easy to apply for a car loan, especially when you follow this guide. Rather than having to go to a dealership or a bank, you can now fill out a car loan application on your computer or smartphone.
Before beginning the loan application process, you need to know exactly what your budget is. Allotting 10% or less of your take-home pay to your combined car expenses is a good idea. This number should include your auto loan, car insurance, gas expenses, and repair costs. Many car lenders offer auto loan calculators to help you learn how much you can afford.
You can secure an auto loan from a variety of places depending on minimum loan amounts. Different lending options bring distinct advantages and downsides, so it’s best to fully explore your options. Here are a few common types of auto lending institutions:
Make sure to only reach out to reputable lenders when you’re looking to finance or refinance a vehicle. While our guide to auto loans can walk you through the standard process, it’s important that you find a legitimate lender or your information could fall into the wrong hands.
You’re likely to encounter the terms “preapproved” and “prequalified” as you navigate the world of auto loans. There are similarities between these terms, but plenty of differences as well.
Being prequalified means you’ve received an estimate for how much you can borrow from a financial institution. There’s no firm loan offer attached here; it’s a quote rather than a commitment from a lender. Financial institutions use soft credit checks for prequalification, so your credit score won’t be affected.
To get preapproved for an auto loan means that a lender has done a hard credit pull and made a firm loan offer to you. Your credit score could temporarily dip if you apply for preapproval from multiple lenders over a few weeks. However, securing preapproval gives you leverage when negotiating with a dealer by making you similar to a cash buyer.
Along with comparing rates from multiple lenders and doing whatever you can to raise your credit score, here are some strategies you can use to get the best deal on an auto loan:
When you’re looking for the best reasonable auto loan rates, always do your research and consider offers from multiple lenders.
Compare which options fit your budget, credit score, and term length below.
*All APR figures last updated on 3/2/2023 – please check partner sites for latest details. Your rate may vary based on credit score, credit history, and loan term.
When getting an auto loan, consider whether you can afford a new vehicle, if now is the right time to get a car loan, whether you’re likely to qualify for a competitive APR, and whether you have the required documents on hand. This guide to auto loans explains other important details to think about before you apply for a car loan.
Our team ranks Bank of America as the top bank for auto loans. Consumers Credit Union is our top pick for credit unions, while myAutoloan is our highest-rated online lender for auto financing.
According to Experian, the average auto loan rates in 2022 are 4.33% for new vehicles and 8.62% for used cars. To get the market’s lowest rates, it’s best to shop around and compare quotes from multiple lenders.
No, 72 months is generally on the long side for an auto loan. It’s recommended to get a shorter car loan if possible, as drivers who take out 72-month terms often end up underwater, or paying more overall than their vehicle is worth.
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