How Auto Loans Work

Auto loans allow you to spread the cost of a vehicle over time instead of paying the full price upfront. Understanding how payments, interest, and loan terms work can help you avoid overpaying.

The loan amount

Your auto loan amount is typically the vehicle’s purchase price minus any down payment, trade-in value, or rebates. Taxes and fees may also be included in the loan.

Interest and APR

Auto loan interest is expressed as an annual percentage rate (APR). Lower APRs reduce the total cost of the loan, while higher APRs increase how much you pay over time.

Loan terms

Auto loan terms commonly range from 36 to 72 months. Shorter terms usually have higher monthly payments but lower total interest. Longer terms reduce monthly payments but increase overall cost.

Monthly payments

Your monthly payment is based on the loan amount, interest rate, and term length. Choosing a payment that fits your budget is key to avoiding missed payments.

Collateral and repossession

Because the vehicle serves as collateral, the lender can repossess it if payments are missed. Staying current on payments protects both your car and your credit.

Understanding total loan cost

Looking beyond the monthly payment helps you understand the true cost of an auto loan. Total interest paid over the life of the loan is an important factor.