Top Car Loan Providers
What Is an Auto Loan?
Car loans, much like personal loans, are offered by traditional banks, credit unions, and online lenders. They're designed specifically for purchasing vehicles. While amounts can vary, many Americans opt for car loans ranging from $5,000 to $40,000. The beauty of car loans? Many can be approved quickly, letting you drive away in your dream car sooner than you might think.
Key Terms You Need to Know
You should be aware of the following terms:
- Annual Percentage Rate (APR) – The rate of interest charged on a Car loan, expressed at an annual rate.
- Collateral - An asset or property secured against a loan. The car you buy with a Car loan is the collateral used for the loan if it is secured.
- Late fee – A fee charged to customers who take out a loan who pay a payment late or pay less than the required monthly amount.
- Principal – The amount of money owed on a loan, excluding the charged interest or APR.
- Unsecured Loan – Most personal loans online are not collateralized. However, car loans may be secured or collateralized with the car the borrower plans to purchase. If you take out a personal loan for a vehicle that is unsecured, the lender assesses your ability to pay, based primarily on your credit score.
How Auto Loans Work
When you apply for a car loan, a lender checks your creditworthiness. The bank may lend you money to buy the vehicle you've always wanted if they think you can handle the responsibility. Car loans are repaid to the lender in monthly installments. Depending on the loan amount, loan term, and interest rate, your monthly payment will vary.
Your loan contract is broken down into the principal and interest on the loan, along with any optional add-ins. Loans with longer terms, such as 60-month or 72-month loans, can lower your monthly payment. When you add up the interest on a longer loan term, you might end up paying more over the life of the loan. In some cases, you may owe more than the car is worth, causing your loan to be upside down.
Auto Loans Rates & Fees
| Credit Score |
Rating |
Average APR - New Car |
Average APR - Used Car |
| 720+ |
Exceptional |
5.18% |
6.79% |
| 660-719 |
Very Good |
6.40% |
8.75% |
| 620-659 |
Good |
8.86% |
13.28% |
| 580-619 |
Fair |
11.53% |
18.55% |
| 579 or below |
Poor |
14.08% |
21.32% |
Source: Experian, the table is based on scores calculated using the VantageScore® credit scoring model
Rates and fees - Last Updated: August 2023
Fees and taxes are incorporated into your principal amount (taxes are determined by the car's total price). This, along with your car loan APR, shapes your monthly payments. Here's a breakdown of potential fees associated with car loans, which might also be relevant if you decide to refinance your vehicle:
- Taxes: When purchasing a new car, sales tax is inevitable. For instance, a 6% sales tax on a $30,000 car translates to an additional $1,800. This amount is integrated into your financing principal. Remember, taxes are a fixed cost, so they're unavoidable. However, you won't have to cover these taxes again if you refinance your car loan.
- Origination Fees: Think of origination fees as the loan's commission. Sometimes referred to as acquisition fees, they cover the necessary paperwork for financing. Typically, they range from 1% to 2% of the loan's principal. For a $30,000 car, a 2% origination fee means an added $600 to your financing.
- Registration Fees: Lastly, there are registration-related costs. These encompass the registration fee, title fee, and occasionally, a plate transfer fee. While the exact amount varies based on your location, you might spend around $150 on these fees. Just like taxes, these fees are set and non-negotiable.
Types of Car Loans
There are a few common types of auto loans:
- New car loans: Enable you to borrow money to buy a new car and pay it off over time. Lenders typically define a new car as one that has never been titled and is the current or previous model year.
- Used or pre-owned car loans: Loans for used cars may come with certain restrictions, such as maximum mileage or vehicle age. These loans can help you pay for a used car you buy from a dealer, from an online car retailer, or from a private party.
- Auto refinancing loans: Allows you to replace your current auto loan with a new one from another lender. Refinancing a car loan can be a way to lower your car payment or pay off your loan sooner, saving you money on the total paid interest.
- Lease buyout loans: This type of loan enables you to finance the purchase of your leased vehicle, so you can keep it or sell it to profit from any equity you have in the car.
- Motorcycle loans: Loans that you can use to buy a motorcycle. They can be secured or unsecured. Secured loans mean you put up your motorcycle as collateral.
- Commercial truck loans: This type of loan helps businesses buy commercial vehicles, such as semi-trucks, for business purposes. This way, a company can obtain the vehicle they need as opposed to waiting until they have the cash on hand.
- Boat loans: These are installment loans that may run from 2 to 7 years. When applied online, this type of loan is not backed by the boat to secure it. Therefore, it represents an unsecured lending product.
- Cash-out auto refinance loans: Work like regular refinancing, but you can borrow extra money against the equity in your car and roll that amount into the refinance loan.
Pros & Cons of Car Loans
| Pros |
Cons |
- Manageable Payments: Loans let you spread out the car's cost over time, reducing upfront expenses.
- Better Car Options: Extended repayment periods might allow you to get a fancier car.
- Ownership: Once the loan's paid, the car's all yours, unlike leasing.
- Potential Credit Boost: Regular loan repayments can positively impact your credit score.
|
- High Monthly Costs: Current high-interest rates mean average new car payments are around $725/month.
- Financial Risks: Missing payments can harm your credit and jeopardize your car ownership.
- Depreciation: Cars lose value as soon as they leave the dealership.
- Commitment: Loans might tie you to one car for longer than you'd like. If you prefer frequent changes, consider leasing.
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How To Apply
To apply for this type of loan, you will need to take the following steps.
- Review Your Credit Report: Before applying for a car loan, examine your credit reports from major bureaus like Equifax, Experian, and TransUnion at AnnualCreditReport.com. Ensure there are no errors, as these can lower your score. If discrepancies arise, dispute them; bureaus have 60 days to respond. Knowing the score will help you determine what APR you will be charged.
- Set Your Budget: Before securing a car loan, establish what you can afford using our car loan calculator to gauge monthly payments and loan duration. Decide between new cars, which are pricier but offer better financing and features, and used cars, which are more affordable and depreciate slower.
- Get Preapproved: Getting preapproval for a car loan clarifies your expected offer. Holding a preapproved loan can enhance negotiation leverage at dealerships, which sometimes mark up APRs for profit. Knowing your preapproved rate ensures you don't overspend and lets you challenge the dealer to offer a better rate.
- Select a Lender: Once you’ve compared multiple loan offers, it’s time to narrow it down to one lender. Once you’ve found a potential lender, be sure to compare features such as down payments, interest rates, fees, terms, and borrowing limits. You may also want to ask about unique features, like financial hardship support.
- Supply the Necessary Info and Documents. When you choose a lender, you will need to provide the required loan documents and information for a car loan. In this case, you need to supply the following details and documents:
- Personal Identification (Social Security card, passport, or driver’s license)
- Proof of earnings or income (W-2s, paystubs, or filed tax returns)
- Employer information (Name of company, manager’s name, and phone number and address)
- Proof of residence (utility bill with your name and address or a lease agreement)
- Finalize Your Car Loan: Once you pick a lender, review the auto financing contract and if everything looks ship-shape, you can finalize the agreement. This federal disclosure highlights your APR, total charges, borrowed amount, and payment details. Ensure you understand all terms, and question any unusual fees before signing. Once satisfied, sign the agreement. Congrats on your new car and loan!
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