The Guide to Auto Loans (2022)

Loans to buy or refinance a new or used car are some of the most common loans available at financial institutions. Auto loans generally come with much lower interest rates than other types of credit, such as credit cards and personal loans, since they’re usually secured loans backed by the car they’re financing.

In fact, APRs can go as low as 0%, but only for buyers with excellent credit. For borrowers with average or poor credit, interest rates can climb into the double digits. According to the Q2 2022 State of the Automotive Finance Market report from Experian, the average auto loan rate is 4.33% for new car purchases and 8.62% for used vehicles.

Loan terms for auto financing typically range from 12 to 84 months, but most experts advise against 84-month auto loans and long terms. While these terms may be attractive to borrowers as they come with lower monthly payments, they also tend to come with higher interest rates and create a financial commitment that can extend beyond a car’s best years.

Types of Auto Loans

In the auto finance industry, borrowers have different situations and needs. As a result, lenders offer alternative financing options to accommodate them. Many of these loan options are similar products with other names, but understanding their differences can help you get a clearer picture of what to shop for.

Purchase Loans

A purchase loan is a loan for buying a vehicle. Within this category, there are three types of loans:

  • New car purchase loan: This loan is used to buy a new vehicle from a licensed dealer. New car loans usually come with lower rates than used car loans.
  • Used car purchase loan: This loan is for purchasing a used vehicle from a licensed dealer. Many lenders charge higher interest rates for vehicles that are older or have more miles on the odometer.
  • Private party loan: This type of loan is used to purchase a vehicle from a private seller rather than a dealer. Many lenders don’t offer private party financing. The ones that do typically charge higher rates because these loans are considered somewhat riskier than traditional purchase loans.

Lease Loans

A lease is essentially a rental agreement for a car, except that when the agreement is over, you may have the option to buy the car. There are two types of lease loans:

  • Lease agreement: A driver gets a car for a certain amount of time, usually 24 to 36 months, with set monthly payments. The driver must return the vehicle at the end of the agreement, but they’ll often have the option to purchase the vehicle at that time.
  • Lease buyout: A driver can secure a lease-buyout loan to purchase their leased vehicle at the end of the term if they opt to buy.

Refinancing Loans

When you refinance an auto loan, you take out a new loan to pay off your existing one. There are two main types of auto refinance loans:

  • Standard refinance: This is a loan that pays off your current one, often with a different term, different interest rate or both. If you can get a lower refinance auto loan rate or take on higher monthly payments with a shorter term, you can reduce the amount you pay in interest. You can also get lower monthly car payments by extending your term, but doing so will increase how much you pay in total interest.
  • Cash-out refinance: With this type of loan, you remove equity from your vehicle in the form of cash when you refinance. This raises your LTV ratio and usually extends your loan term.

Where To Find Auto Loans

Auto loans are popular financial products, so you can find them practically anywhere. Lending options have different features and advantages that may appeal to different borrowers.

Banks

Brick-and-mortar banks are still popular choices for auto financing. Traditional banks generally offer competitive rates, but they may have stricter lending requirements than other options. Many banks offer discounts to people who have other accounts with the company, such as checking accounts, savings accounts or credit cards.

Credit Unions

Credit Unions are similar to banks but are member-owned organizations rather than for-profit commercial financial institutions. These organizations often have more lenient lending requirements than banks and may have lower interest rates. Most credit unions require membership, but many allow you to join for a small donation to the credit union or a charity.

Dealerships

Car dealerships often have in-house financing options that may offer lower interest rates than some banks and credit unions. Larger, branded dealerships may even offer 0% APR car deals on new vehicles to buyers with excellent credit.

Independent dealerships, sometimes called buy-here, pay-here (BHPH) dealerships, may also have their own financing options. While these vehicle loans may be accessible to borrowers with bad credit, many of them come with sky-high interest rates. It’s also common for BHPH dealers to install tracking devices on vehicles they finance and charge for this service.

Online Lenders

In an age where people buy practically everything online, auto loans are also widely available over the internet. Some of these online companies are direct lenders backed by banks, while others are lending brokers that seek out financing options for you. And some are loan marketplaces that allow you to post your needs and information online and wait for lenders to send offers to you.

Online lending has made it easy to compare loan offers. Applying online can be a fast, easy process. You may even get offers or approval within minutes, if not instantly.

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