1. What a Car Loan Is
A car loan (auto loan) is money borrowed from a bank, credit union, or lender to purchase a vehicle. The vehicle itself serves as collateral, meaning if payments stop, the bank can repossess the car.
2. Typical Loan Structure
- Loan Term: Usually 36 to 72 months (3–6 years). Some lenders now offer up to 84 months.
- Interest Rates (APR):
- Excellent credit (720+): ~5% or lower.
- Good credit (660–719): ~6–9%.
- Fair/poor credit (below 660): 10–20% or more.
- Down Payment: Many banks require at least 10–20% upfront, though some offer zero-down financing.
- Monthly Payment: Fixed, includes principal + interest.
3. Banks & Lenders
- Major Banks Offering Car Loans: Chase, Bank of America, Wells Fargo, U.S. Bank, Capital One.
- Credit Unions (Navy Federal, PenFed, etc.) often offer lower rates.
- Dealership Financing: Many dealerships work with banks but rates may be higher than going direct.
4. Requirements
Banks typically check:
- Credit score & history.
- Income & employment stability.
- Debt-to-Income (DTI) ratio.
- The vehicle’s value (new vs. used cars affect rates).
5. Pros & Cons
✅ Pros:
- Lets you buy a car without full upfront payment.
- Competitive interest rates if you have good credit.
- Builds credit history with on-time payments.
⚠️ Cons:
- Interest adds to total cost of the car.
- Long-term loans (72–84 months) = lower monthly payments but more interest paid overall.
- Car depreciation may outpace loan repayment (“upside down” loan).
6. Current Trends (2025)
Online banks & fintech lenders are competing with traditional banks, often with faster approval.
Interest rates are higher than a few years ago due to Fed policy (average new-car loan around 6–7%, used-car loan ~8–11%).
Longer loan terms (72–84 months) are becoming more common to keep payments affordable.