The Car Loan Guide (2022)
Loans to buy or refinance a new or used car are among the most common loans offered by financial institutions. Car loans usually come with much lower interest rates than other types of credit, such as credit cards and personal loans, because they are usually secured loans backed by the car they finance.
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 soar into the double digits. According to Q2 2022 State of the car finance market Experian report, the average auto loan rate is 4.33% for new car purchases and 8.62% for used vehicles.
Loan terms for auto finance typically range from 12 to 84 months, but most experts advise against 84 month car loan and long term. While these terms can be attractive to borrowers because they come with lower monthly payments, they also tend to come with higher interest rates and create a financial commitment that can extend beyond best years of a car.
Types of car loans
In the auto finance industry, borrowers have different circumstances and needs. As a result, lenders are offering alternative financing options to accommodate them. Many of these loan options are similar products with other names, but understanding their differences can help you have a clearer idea of what to buy.
A purchase loan is a loan for the purchase of a vehicle. In this category, there are three types of loans:
- Loan for the purchase of a new car: This loan is used to purchase a new vehicle from an authorized dealer. New car loans usually come with lower rates than used car loans.
- Loan for the purchase of a used car: This loan is intended for the purchase of a used vehicle from an authorized dealer. Many lenders charge higher interest rates for vehicles that are older or have more miles on the odometer.
- Loan to an individual: This type of loan is used to purchase a vehicle from an individual rather than from a dealer. Many lenders do not offer private financing. Those who generally charge higher rates because these loans are considered a bit riskier than traditional purchase loans.
A lease is basically a rental contract for a car, except when the contract is over, you may have the option of buying the car. There are two types of leasing:
- Rental agreement: A driver gets a car for a certain period of time, usually 24 to 36 months, with fixed monthly payments. The driver must return the vehicle at the end of the contract, but will often have the option of purchasing the vehicle at that time.
- Lease buyout: A driver can get a lease to buy their leased vehicle at the end of the term if they choose to buy.
When you refinance a car loan, you take out a new loan to pay off your existing loan. There are two main types of auto refinance loans:
- Standard refinance: This is a loan that pays off your current loan, often with a different term, different interest rate, or both. If you can get a lower price auto loan refinance rate or accept 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 this will increase the total amount you pay in interest.
- Refinancing by collection: With this type of loan, you withdraw equity from your vehicle in the form of cash when you refinance. This increases your LTV ratio and generally extends the term of your loan.
Where to find auto loans
Car loans are popular financial products, so you can find them virtually anywhere. Loan options have different features and benefits that may appeal to different borrowers.
Physical banks are still popular choices for auto financing. Traditional banks generally offer competitive rates, but they may have stricter loan 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 are similar to banks, but are member-owned organizations rather than for-profit commercial financial institutions. These organizations often have more lenient loan requirements than banks and may have lower interest rates. Most credit unions require membership, but many allow you to sign up for a small donation to the credit union or charity.
Car dealerships often have in-house financing options that may offer lower interest rates than some banks and credit unions. The larger brand name dealers may even offer April 0% Car Deals on new vehicles to buyers with excellent credit.
Independent dealers, sometimes referred to as buy here, pay here (BHPH) dealers, may also have their own financing options. Although these auto loans may be available to borrowers with bad credit, many of them come with exorbitant interest rates. It is also common for BHPH dealerships to install tracking devices on the vehicles they finance and charge for this service.
At a time when people buy virtually everything online, car loans are also widely available on the internet. Some of these online companies are bank-backed direct lenders, while others are loan brokers who find financing options for you. And some are lending marketplaces that allow you to post your needs and information online and wait for lenders to send you offers.
The online loan made it easy to compare loan offers. Applying online can be a quick and easy process. You can even get offers or approval in minutes or even instantly.