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A lender pays the seller, and you repay the lender in fixed monthly payments, usually over 3 to 7 years. The lender holds a lien on the title until you're done. You can arrange the loan directly with a bank or credit union, or through a dealer. If you stop paying, the car can be repossessed, and you may still owe any shortfall after it's sold.

Most auto loans use simple interest. Each month, you pay interest on the current balance, and the rest goes to principal. On $35,000 at 7%, the first month's interest is about $204. Because the balance falls, interest falls too, and more goes to principal. Paying early or adding extra reduces the interest you owe, since interest is calculated on the actual balance.

A popular guide is the 20/4/10 rule: 20% down, a term of no more than 4 years, and total car costs of no more than 10% of gross income. It's strict, but it's a good test. On a $75,000 salary, that's about $625 a month for the payment, insurance and fuel. Try different loan amounts above to find a payment that fits your budget.

It depends on your credit, the car's age, the term and today's market. Excellent credit on a new car gets the lowest rates, while used cars and lower scores cost more. Compare preapprovals from a credit union and a bank with whatever the dealer offers, all on the same day. Use the APR for your comparison, and watch for add-ons that are rolled into the loan.

Lenders look at your credit, income, existing debts, down payment and the car's value. Many consider your payment-to-income ratio, often preferring the car payment under about 15% of your gross monthly income. The amount you can qualify for may be higher than what's comfortable, so set your own limit first. Getting preapproved lets you know what you can borrow before you start shopping.

Longer loans of 72 months and up have become common as car prices rise. A 72-month loan lowers the payment, but you'll pay more interest and stay upside down longer. If it's the only way the car fits your budget, a cheaper car might be the better choice. If you do take one, make extra payments when you can, and check that there's no prepayment penalty.

A new lender pays off your current loan, and you repay the new one, ideally at a lower rate. It can make sense if your credit has improved or if your original rate was marked up. Compare the total cost, not just the payment, because a longer term could cost more overall. Check for fees, and for any requirements on the car's age or mileage.

Applying causes a small dip from the hard inquiry, but credit scoring models usually treat several auto loan inquiries within a short shopping window as one. A new loan lowers your average account age. On-time payments help build your score over time, and late ones damage it. Paying off the loan early closes the account, which can cause a small, temporary change.

For most personal car loans, it historically hasn't been. A US deduction was added for some new American-assembled vehicles bought for personal use, for tax years 2025 through 2028, within limits and income phase-outs. Business use has separate rules. Check the IRS for current details and whether your car qualifies, and ask a tax professional before counting on it.

If your car is stolen or totaled, your regular insurer pays its market value, which may be less than you owe. Gap coverage pays the difference. It's most useful with a small down payment or a long loan, when you may be upside down. It's often cheaper from your auto insurer than from a dealer. You can usually drop it once you owe less than the car is worth.

Yes. Dealers can arrange a loan through a lender and may add a markup to the rate they get. If you come with a preapproval, you can ask them to beat it. Negotiate the car's price first and separately, then the financing, then any add-ons. Read the contract to confirm the rate and term match what you've agreed before you sign.

Ask for a payoff quote, which includes interest up to a specific date. Most simple-interest loans save you interest if you pay early, and many have no penalty, but check your contract. After the final payment, the lender releases the lien and the title comes to you. Keep your insurance going, though you might choose to change your coverage once you own the car outright.

Compare what you'd pay in total each way, over the same term. Take the rebate and borrow less at your own rate, or skip it and borrow more at the promotional rate. On our $40,000 example over 6 years, a $3,000 rebate at 7% costs $3,202 more than 0.9% financing, but $89 less than 3.9% financing. The calculator runs this for you when you choose Compare them.

Count the loan interest, insurance, fuel, upkeep, sales tax, fees and the value the car loses, then divide by the months you own it. In our example, that's about $853 a month against a $587 payment. Depreciation is usually the biggest cost of a new car, so buying a lightly used one, or keeping a car longer, often saves more than a lower rate.