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An auto loan is one of the most common types of loans. Auto loans are used to purchase new or used vehicles. The vehicle becomes the collateral for the loan. Lenders tend to be a little lenient with auto loans because the amount of the loan can vary greatly. If the vehicle costs only a few thousand dollars then it will be much easier to qualify for it then a loan on a vehicle that costs $20,000. In addition, lenders can easily recover the vehicle if the borrower defaults on the loan.

For most people an auto loan is going to be one of the first experiences they have with a loan. It can also be quite confusing. Many times dealers get involved in the loan process and this can end up being beneficial or not so beneficial for the borrower. It is important to understand the aspects of an auto loan so that you can get the best deal.

Types Of Auto Loan Interest Rates

There are two basic types of auto loans as categorized by the interest rate. The interest rate will either be variable or fixed. Interest is one of the largest costs of a loan, so understanding the type of interest rate is very important to the overall expense of getting the loan.

Fixed interest rates stay the same of the life of the loan. Every month you know exactly what your loan payment will be because it never changes. Fixed interest rates give you a steady payment that you can work into your monthly budget.

Variable interest rates change. The interest rate can change from month to month, so your loan payments can differ each month. However, interest rates go up and down, so over the length of the loan with a variable rate you may end up paying less interest then with a fixed rate.

Lender Options

When it comes to auto loans there are plenty of options in lenders. You do not have to go to a bank and you do not have to stick with whatever the dealer gives you. Many times people think that the dealer handles financing, but this is not completely true. The dealer may assist you in finding a lender, but you also have every right to find a lender yourself. Here are some of the places you can look for an auto loan:

  • Auto loan company
  • Banks
  • Credit unions
  • Dealer financing
  • Buy here, pay here

Each of these options has its own good and bad points. You should understand a little more about each option before making a final decision on which lender to go with.


An auto loan company specializes in only auto loans. They usually have many different types of loan options, including loan for people with no or bad credit. An auto loan company can offer you options that you may not be able to get elsewhere. They tend to pose fewer limitations and be able to customize a loan to your needs. It may be difficult to find an auto loan company, though. This limits your ability to shop around for your auto loan.


Your traditional bank is often going to be the first place you look because they are readily available and easy to find. You will often be limited by your credit with a bank. They do not tend to have a lot of options if you do not have good credit.


A credit union is usually going to offer lower costs and better choices than a bank. Again, though, your credit may limit you in getting the loan you want. If you have a good relationship with the credit union this can be very helpful when you are negotiating the loan.


Most people take the easiest route and let the dealer find them financing. While this is the easiest way to go, it often means you have no choice. If you have credit problems you will often get one offer and that is it. Additionally, you never know exactly how hard the dealer is working to find you the best deal. They just want to find a deal you will agree to. The dealer may have relationships with lenders that allow them to secure financing for really bad credit, though, so it may be your best option if your credit is horrible.


Not as common as other financing options, but buy here, pay here lenders are still around. This is where the car dealer is the actual financier for the vehicle. They do not usually do a credit check and will only require proof of income for the past month or so. They do not give you any money, but rather give you credit. You make the monthly payment to them. If you default they simply take the car back. There is little risk for the borrower except the money they lose on payments and down payments they have made. The majority of the risk lies with the dealer. This is part of the reason why this type of auto loan is getting less popular.

Things To Consider

People often rush into auto loans without thinking about what they are getting into. Many times the need for a vehicle overwhelms the need for a good financial deal. This can cause problems in the long run. Instead of jumping into an auto loan you need to take time to consider a few things first.


  • Know the vehicle you want. Make sure you know the best price you can get it for. Negotiate for the best price.
  • Find out the best interest rate you can expect and work until you get it.
  • Consider how long you want the loan for and what monthly payment you can afford.

Knowing what you want before you start auto shopping will help you to not be pressured into a deal that will not work for you. So many times people jump into auto loans without making considerations. Have a good idea of what you want beforehand so you can walk away pleased with deal instead of wondering what you have gotten yourself into.


  • Go to different lenders and try to get pre-approved for a loan. This will give you bargaining power when you go to the dealer. Additionally, it will stop you from having the dealer involved in the financing.
  • Even if you do not get pre-approved, you will be able to get an idea of how much you can borrow and the likely terms of the loan.

You should go to different types of lenders and even check online. By going to the dealer with financing already on your mind and some information under your belt, you will be able to be in a better position for negotiating.


Understand that you may end up owing more on the loan then the car is worth. This puts you at a risk should you default because the vehicle alone will not pay off the loan.

Many times people think more about right now than the future. You can minimize your risk by making sure that the loan you get starts out as smaller than the amount your new vehicle is worth. You can also make a larger down payment to help reduce the amount you need funded through a loan.

Being prepared before you get an auto loan is the only way to safeguard yourself against a bad deal. It can be easy to give into high pressured salespeople who only care about getting their commission for selling you a vehicle. You have to look out for yourself and getting prepared before shopping is the best way to that.

Getting Approved

There are some things you need to know that can help you to understand how to get the best auto loan. Getting approved is probably not going to be very difficult, seeing that there are so many lenders out there willing to deal with people, regardless of credit history. The biggest concern when it comes to auto loans is understanding how to close the deal.

Here are two points that you need to understand about closing the deal that help you make sure you are getting a loan that really meets your needs.

  • The down payment or trade in
  • Insurance


A down payment or trade in is typical in the process of buying a vehicle. The down payment or trade in amount takes money off of the amount you will need to borrow to finance the purchase. The less money you borrow, the interest you pay and in the end the less the loan will cost you. Therefore, you want to have as large of a down payment or trade in that you can. If you are using a trade in then you will want to do some research beforehand to figure out how much your trade in is worth, so that you can ensure you get the amount you should from the dealer.

Remember the less you finance the less it will cost you in the long run and the easier it will be for you to get the loan.


When you get an auto loan the lender is going to want you to have full coverage auto insurance. This is protection for them on their investment. The whole idea is that with insurance if you get in an accident the lender can recover money even if the car is now worthless. Without insurance you no longer have collateral if you total the vehicle and the lender is at risk.

Before shopping for a vehicle you should make sure you can get full coverage insurance. You should also get an estimate of how much it will cost. Remember you are going to have to be able to afford the insurance and the loan payment. If you do not currently have full coverage insurance then this could mean an extra expense in your monthly budget.

By having or already checking into your insurance you will show the lender that you are prepared for the responsibility of the new vehicle, which is a good thing that may help you get approved.

Getting an auto loan is something that you will likely consider. After everything you have learned you should be on good, solid ground to negotiate a deal that is affordable and fair. You will find that being prepared and knowledgeable can really give you an upper hand in securing your auto loan.

LOAN GUIDE – Everything You Always Wanted To Know About Loans

Part 1 – Getting An Auto Loan
Part 2 – Home Loans
Part 3 – Commercial Loans
Part 4 – Personal Loans
Part 5 – Student Loans
Part 6 – Securing A Loan
Part 7 – Loan Application

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