Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 26, 2021

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  • Auto loan payments depend on the annual percentage rate (APR), loan amount, and loan term
  • RateGenius and Autopay have low APRs for customers with good credit
  • If you’re financing your vehicle, you’re required to carry full coverage auto insurance

Are you unsure about how auto loans work?  

It’s okay to have anxiety about auto loans. A car is an investment and making the right move is essential to having reliable transportation.

But you don’t need to worry anymore — we’re here to help. Our guide has everything you need to know about how car loans work.

Once you learn everything about how auto loans work, enter your ZIP code in the free online quote tool above and compare multiple lenders near you.

How do auto loans work?

A car loan is a loan that’s specifically for purchasing a vehicle after you’ve made a down payment. You can get an auto loan from a bank, credit union, finance company, or any other lending agency.

Here’s a list of required information you’ll need to provide when you get a car loan.

  • Permanent address
  • Employment history
  • Social Security number
  • Proof of income
  • Information on other debts

The key to an effective auto loan is determined by three factors. Continue reading to learn what factors affect your car loan.

Three Factors That Determine Auto Loan Monthly Payments

You’ll need an auto loan that you can afford. According to the Consumer Financial Protection Bureau (CFPB), lenders will look at your debt-to-income ratio to determine risk.

If you earn more money than you have debt, you’re eligible for a car loan. However, paying more on your debt than your monthly income isn’t helpful for the borrower.

It all depends on the loan amount, annual percentage rate (APR), and loan term. Read on for more details.

Loan Amount

The loan amount is usually the value of the car or the cost of the vehicle you’re purchasing. Try to negotiate the price of the vehicle. This helps you secure a lower loan.

Annual Percentage Rate

Each loan has an annual percentage rate. The APR varies for each lender. However, you can secure a lower APR if you have exceptional or good credit.

Fair and poor credit produces higher APRs. Lenders who don’t check your credit have high APRs, also.

Loan Term

Lenders usually have a loan term. A loan term is the number of months it takes for you to pay back the loan and its interest.

Your loan term depends on the lender. The most common loan terms are from 24 months to 84 months.

The average car loan term for new cars is 69 months, but used cars have an average loan term of 65 months.

Are auto loan calculators helpful?

If you want to get an idea of how car loans work per month, use an APR car loan calculator (also known as an auto loan calculator).

These calculators can estimate your monthly payment based on the APR, loan term, and loan amount that you enter.

If you type “auto loan calculator” or “car loan calculator” in the Google search bar, you can estimate a car loan’s monthly payment using Google’s car loan calculator tool.

The auto loan calculator doesn’t promise that you’ll get that exact monthly payment for your auto loan. However, it gives you an idea of how your car loan works.

How much does an auto loan cost per month?

Monthly payments for a car loan depend on the loan amount, APR, and the loan term. Let’s look at an example.

You get approved for a $10,000 auto loan with a 2.74% APR at 36 months. The total balance would be $10,428 due to the 2.74% interest rates at the end of 36 months.

The $10,000 balance is paid off within 36 months. If your loan type allows you to pay extra to get the total balance down, you can red light the upcoming interest charges.

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Different Types of Auto Loans

Before you get a car loan, you should know what kind of car loans are out there. Each auto loan does something different. Go through the smaller sections below to see what various car loans do.

Secured Auto Loans

A secured car loan is a loan that requires you to put up an asset (collateral) to get the loan. The asset is usually the vehicle you buy. If you don’t make payments or default on the auto loan, the lender may repossess your car.

Unsecured Auto Loans

An unsecured car loan doesn’t require you to use an asset to get a loan. However, the auto loan’s APR is higher. Defaulting on your unsecured auto loan will affect your credit.

Simple Interest Auto Loans

If you want to pay off your car loan early, you should consider getting a simple interest car loan.

You can beat the interest rates by paying extra money down. As your principal balance gets smaller, so will the interest rate charges.

Pre-Computed Auto Loans

The pre-computed car loans are the opposite of simple interest car loans. Paying extra money doesn’t pay down on the total balance due.

A pre-computed auto loan works by issuing a fixed payment schedule for borrowers.

Lease Buyout Auto Loans

This loan is for borrowers who have decided that they want to own a leased vehicle. A lender will give you a lease buyout car loan to buy a leased car after the leasing agreement has ended.

After the lender pays an upfront fee, the borrower must pay a fixed payment per month until the auto loan is paid off.

Title Loans

A title loan is like a payday loan, but you have to put up your vehicle’s title as collateral. Banks and credit unions provide auto equity loans. Car equity loans offer lower interest rates and higher loan limits.

Title loans usually have higher interest rates than other secured loans you get from banks or credit unions.

Buy-Here-Pay-Here Auto Loans

It’s not an auto loan, but some dealerships allow you to pay the vehicle’s balance from their facility. Once you’ve paid your balance in full, the car is yours.

What’s the difference between direct financing and indirect financing?

Financing varies for each lender. If you want to go through a bank, credit union, or finance company, you’ll use direct financing. This gives you direct access to the lender.

When the dealer selects the loan agency for you, that’s known as indirect financing. Indirect financing may be necessary if your credit doesn’t meet a lender’s requirements.

In this case, a dealer helps you secure an auto loan. However, indirect financing adds one percent to your car loan’s APR.

Which lenders have the best auto loans?

You can find lenders all over the United States, even online. We researched the best lenders and put together a list of the top lenders in 2021. Check out the results below.

Top 12 Lenders for Good and Bad Credit Auto Loans
LendersMinimum Credit ScoreEstimated APRLoan Amount
RefiJet5802.45% to 17.99%$7,500 to $15,000
RateGenius5501.99% to 16.00%$12,000 to $100,000
Consumers Credit Union6202.69% to 21.24%$5,000 to $75,000
Tresl5002.49% to 23.99%$5,000 to $100,000
MyAutoloan5002.05% to 29.40%$5,000 to $99,000
LightStream6602.99% to 9.99%$5,000 to $100,000
Autopay6001.99% to 17.99%$2,500 to $100,000
Ally Clearlane5803.74% to 7.49%$10,000 to $80,000
LendingClub640N/A$5,000 to $55,000
Capitol OneN/A2.99% to 24.99%$4,000 to $75,000
CarvanaNone3.90% to 27.90%$1,000 to $85,000
VroomNoneN/A$5,000 to $100,000
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RateGenius and Autopay had the lowest APR. However, RateGenius has a lower credit score requirement. Ally Clearlane had the lowest maximum APR.

Shop around to find an APR that works best for you.

How do auto loans work from credit unions?

Credit unions are more understanding when it comes to your credit situation. That’s because credit unions focus more on their customers rather than making profits.

Explain your situation to the credit union, and you could secure a lower APR than expected.

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Can auto loans affect auto insurance policies?

The short answer is yes. If you’re financing your vehicle, you’re required to carry full coverage auto insurance by the lender.

Full coverage car insurance is collision and comprehensive coverage added to your car insurance policy.

Although the state requirement is liability coverage in most areas in the United States, loan agencies want to protect the asset through total car insurance coverage.

Take it a step further and enroll in GAP insurance. This ensures that the car loan is paid in full if the vehicle is in a total loss accident.

Can someone take over my existing auto loan if something happens?

The answer is yes. However, the person taking over your car loan must be approved first.

Your lender will ask for the exact requirements you had, run a credit check (if necessary), and approve the loan if everything works out. The loan changes ownership, and you’ll be free of the debt.

If you have a cosigner, the loan agency will ask for payments from the other person on the contract.

How Auto Loans Work: What’s the bottom line?

Auto loans are specifically for vehicles. You can use a personal loan to buy a car, but getting a car loan is much easier. Besides, auto loans have lower interest rates than personal loans.

Now that you know how auto loans work, use our free comparison tool below to compare multiple lenders in your area.