Understanding Auto Loans
An auto loan is a secured loan where the vehicle serves as collateral. This means if you don't make payments, the lender can repossess the car. The good news? Secured loans typically have lower interest rates than unsecured loans.
Key Factors That Affect Your Payment
Loan Term Length
| Term | Monthly Payment | Total Interest | Trade-off |
|---|---|---|---|
| 36 months | Higher | Lower | Less interest, faster payoff |
| 60 months | Medium | Medium | Balance of payment and cost |
| 72+ months | Lower | Higher | Lower payments but more interest |
Long Terms = More Depreciation
Interest Rate (APR)
Your credit score heavily influences your rate:
| Credit Score | Typical Rate (New) | Typical Rate (Used) |
|---|---|---|
| Excellent (750+) | 3.5-5% | 4.5-6% |
| Good (700-749) | 5-7% | 6-8% |
| Fair (650-699) | 7-10% | 9-12% |
| Poor (below 650) | 10-15%+ | 12-18%+ |
Down Payment
A larger down payment means a smaller loan balance and potentially a better interest rate.
- 20% down is ideal to avoid negative equity
- 10% down is the minimum recommended
- Trade-ins count toward your down payment
The Auto Loan Formula
M = P × [r(1+r)ⁿ] / [(1+r)ⁿ - 1]
Monthly payment calculation
New vs. Used Car Financing
| Factor | New Car | Used Car |
|---|---|---|
| Interest Rates | Lower (3-6%) | Higher (5-10%) |
| Loan Terms | Up to 84 months | Usually 36-60 months |
| Depreciation | 20-30% in year 1 | Already depreciated |
| Warranty | Full manufacturer | May be limited/none |
Sweet Spot
Hidden Costs to Consider
- Sales tax (varies by state, typically 5-10%)
- Registration and title fees
- Documentation fees (dealer fees)
- Gap insurance (if you owe more than car is worth)
- Extended warranty (optional but consider it)
- Insurance increase for new/expensive vehicles
Negotiate Everything
Where to Get an Auto Loan
| Source | Pros | Cons |
|---|---|---|
| Credit Union | Best rates, member-focused | Membership required |
| Bank | Existing relationship | Rates may be higher |
| Dealer Financing | Convenient, promotions | Often higher rates |
| Online Lenders | Fast, competitive | Less personal service |
Get Pre-Approved First
Common Auto Loan Mistakes
- Focusing only on monthly payment (not total cost)
- Accepting the first dealer financing offer
- Financing for too long (over 60 months)
- Rolling negative equity into a new loan
- Skipping the pre-approval process
- Adding unnecessary dealer add-ons
Frequently Asked Questions
Q: What's a good monthly car payment?
A: The 20/4/10 rule: 20% down, 4-year loan, and payments under 10% of gross monthly income. Total auto costs (payment + insurance) shouldn't exceed 15-20%.
Q: Should I pay off my car loan early?
A: Usually yes, unless your rate is very low (under 4%) and you could invest the money at higher returns. Check for prepayment penalties first.
Q: Is 0% financing a good deal?
A: It can be, but you often have to choose between 0% and cashback rebates. Do the math — sometimes the rebate plus regular financing is cheaper.
Q: Should I finance through the dealer?
A: Get outside pre-approval first, then see if the dealer can beat it. Never let them know your approval rate until you've negotiated.
Q: How much should I put down?
A: At least 10%, ideally 20%. This reduces your loan amount, lowers payments, and helps avoid negative equity.
This calculator provides estimates for planning purposes. Actual rates and terms depend on credit history, lender policies, and market conditions. Contact lenders for exact quotes.