A car loan is usually a type of loan secured by the car you’re buying, but some financial institutions offer unsecured car loans. Auto loans can be used to purchase a new or used vehicle, refinance your current loan, purchase a lease, or purchase a recreational or powersports vehicle.
Auto loan lenders typically have repayment terms ranging from 36 to 84 months, although some may have shorter or longer term limits. Keep in mind that if you default on your loan, your lender may repossess your car and your credit score may drop.
How do car loans work?
With a car loan, in exchange for paying money to a dealer (or private seller) so you can buy a car, you agree to repay the lender over a set period of time (usually three to six years). By paying interest, the total cost of borrowing is more than the purchase price of the car and represents a profit for the lender. How much more you pay in interest largely depends on your credit score.
interest rate or annual interest rate
The interest rate on a car loan is the percentage of the loan amount that you pay the lender each year. This is the cost of borrowing money. APR (Annual Percentage Rate) is also a percentage, but it includes not only the interest rate but also other fees associated with the loan, such as origination fees and prepayment penalties. The APR is a better measure of the actual cost of borrowing than the interest rate alone because it takes into account all fees you pay.