What are car loans and how do they work?

Auto loans are secured loans that use the car you are buying as collateral. You are typically asked to pay a fixed interest rate and monthly payment for 24 to 84 months, at which point your car will be paid off. Many dealerships offer their own financing, but you can also find auto loans at national banks, local credit unions, and online lenders.

Because when you finance a car it is a secured loan, and they tend to come with lower interest rates than unsecured loan options like personal loans. As of September 8, 2022, the average APRs according to a Bankrate study are the following.

New car

36-month term: 5.04 percent.
48-month term: 5.07 percent.
60-month term: 5.08 percent.
72-month term: 5.28 percent.

Used car

36-month term: 5.11 percent.
48-month term: 5.37 percent.
60-month term: 6.58 percent.

Types of auto loans

Car loan options go beyond just new and used. Each auto loan type has specific uses, and knowing what type you need can make the loan shopping process easier.

New car loan: If you are looking to purchase a new car, you should seek out a new car loan. Dealerships offer new car financing on the lot, but you can also get them from banks, credit unions, and online lenders. Shop around for your best interest rate and terms.
Used car loan: Buying a used car from a dealership will require a used car loan, and you can get them at the same places you would get a new car loan. Limits are often placed on how much mileage can be on the car and how old it can be.

Auto refinances: If you originally took out a loan at a dealership, or just didn’t get a good rate, you may want to refinance and get a better interest rate. Or you can rework your terms to get a lower monthly payment. These loans aren’t available through dealerships.

Cash-out auto refinance: To get a little extra cash with your refinance, you can take out a cash-out refinance loan. The equity you have in your car can be borrowed along with the balance you are refinancing.
Private party: When you are buying a used car from an individual seller and do not have the cash on hand, you will need a private party auto loan. These are less common but available at some banks, credit unions, and online lenders.

Lease buyout: Leasing a car can come with the option to buy the vehicle at the end. To do so, you can take out a lease buyout loan.

Leave a Comment