Auto Loan Payment Guide
Auto loans allow you to purchase a vehicle by borrowing money and repaying it over time with interest. Unlike leasing, you own the vehicle and can drive unlimited miles, modify it, and keep it as long as desired. Auto loan terms typically range from 36 to 84 months, with shorter terms saving money on interest but requiring higher monthly payments.
Vehicle depreciation is a critical factor in auto financing. New cars lose 20-30% of value in the first year and about 50% by year three. This means you could owe more than the car's worth (being underwater or upside-down) if you financed too much with too little down. Gap insurance protects against this by covering the difference if your car is totaled.
Credit score dramatically affects auto loan rates. Excellent credit (750+) can secure rates under 5%, while poor credit may face 15%+ or dealer 'buy here, pay here' arrangements with extreme rates. Improve your credit before shopping, or consider having a creditworthy co-signer. Always negotiate the vehicle price separately from financing terms - dealers often offset low rates with inflated prices.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
New cars offer warranties and latest features but depreciate quickly. Used cars (2-3 years old) offer better value with less depreciation. Certified pre-owned provides middle ground with warranties and inspection.
48-60 months balances affordable payments with reasonable interest costs. Avoid 72+ month terms unless necessary - they mean paying for a rapidly depreciating asset long after it's worth less than you owe.
Yes, but if you owe more than its trade-in value (negative equity), that amount rolls into your new loan. This increases debt and risk of being underwater on the new loan too.
Get pre-approved from banks or credit unions first to know your rate. Dealers can sometimes beat it with manufacturer incentives, but having a backup prevents pressure to accept unfavorable terms.
Beyond the loan, budget for insurance, gas, maintenance, registration, and repairs. Total transportation costs ideally shouldn't exceed 15-20% of take-home pay, including the loan payment.