A car loan is a type of secured debt that lets you borrow money to buy a vehicle and pay it back in fixed monthly installments, typically over three to seven years. The vehicle itself serves as collateral, meaning the lender holds the car’s title until you’ve paid off the balance in full. If you stop making payments, the lender can repossess the car and sell it to recover what you owe.
How a Car Loan Works
When you finance a vehicle, you agree to repay the amount borrowed (the principal) plus interest over a set number of months. Each monthly payment chips away at both the interest and the principal. Early in the loan, a larger share of your payment goes toward interest. As the balance shrinks, more of each payment applies to the principal.
The interest rate on your loan is expressed as an APR, or annual percentage rate, which represents the yearly cost of borrowing. Your rate depends heavily on your credit score, the loan term, whether the car is new or used, and the lender you choose. According to Experian data from late 2025, borrowers with credit scores above 780 averaged 4.66% on new car loans, while those with scores between 601 and 660 averaged 9.57%. Used car rates run higher across every credit tier, with that same 601-to-660 range averaging 14.49%.
Because the car is collateral, auto loans tend to carry lower rates than unsecured borrowing like personal loans or credit cards. The tradeoff is the repossession risk: fall behind on payments and the lender has a legal claim to the vehicle.
Where to Get a Car Loan
You have two main paths: arranging financing yourself before you shop (direct financing) or letting the dealership handle it when you buy (indirect financing). Each has real differences in cost and convenience.
Direct Financing
With direct financing, you apply for a loan through a bank, credit union, or online lender before visiting a dealership. Many lenders offer preapproval, which tells you roughly how much you can borrow and at what rate before you start shopping. This gives you negotiating leverage because you’re essentially a cash buyer from the dealer’s perspective.
The main advantage is control. You can compare offers from multiple lenders, and there’s no intermediary adding a markup to your rate. Credit unions in particular often offer competitive auto loan rates. The downside is that it takes more legwork: you’re researching lenders, submitting applications, and managing the process yourself.
Dealership Financing
With indirect financing, the dealership’s finance department submits your application to its network of lenders and presents you with options. This is convenient since you can pick a car and arrange the loan in one visit. However, dealerships sometimes mark up the interest rate they receive from the lender, which means you could end up paying more than necessary. You also have less visibility into what other lenders might have offered.
A practical approach is to get preapproved through a bank or credit union first, then let the dealership try to beat that rate. This way you benefit from the convenience of dealer financing without giving up your fallback option.
Loan Terms and What They Cost
Car loans typically come in terms of 24, 36, 48, 60, 72, or 84 months. Some lenders offer terms as short as 12 months or as long as 96. The average loan term is just under 69 months for new cars and about 68 months for used cars.
Longer terms mean lower monthly payments, but they cost significantly more in total interest. On a $35,000 loan at 9% APR, here’s what the difference looks like:
- 36 months: $1,113 per month, $5,068 in total interest
- 60 months: $727 per month, $8,593 in total interest
- 84 months: $563 per month, $12,302 in total interest
Stretching that same loan from 60 to 84 months saves you $164 a month but costs an extra $3,700 in interest over the life of the loan. Longer terms also increase the risk of being “upside down,” where you owe more than the car is worth. This becomes a problem if you need to sell the vehicle or it’s totaled in an accident.
A common guideline is to keep new car loans at 60 months or less and used car loans at 36 months or less. Used cars depreciate faster and may need costly repairs before a long loan is paid off.
What You Need to Qualify
There’s no universal minimum credit score for a car loan, but your score shapes the rate you’ll receive. Borrowers with scores above 780 get the best rates, while those below 600 face APRs that can exceed 19% on used cars. Some lenders specialize in bad-credit auto loans, though the cost of borrowing is substantially higher.
Beyond your credit score, lenders evaluate several factors:
- Income verification: Lenders want proof you can afford the payments. This typically means recent pay stubs, W-2s, or tax returns. Self-employed borrowers can often use tax returns, 1099 forms, or profit-and-loss statements.
- Debt-to-income ratio: This is your total monthly debt payments divided by your gross monthly income. If your existing debts already consume a large share of your income, lenders may decline the application or offer less favorable terms.
- Employment history: Steady employment signals reliability to lenders. Most want to see current employment, though the specific requirements vary.
- Down payment: Putting money down reduces the amount you need to borrow, lowers your monthly payment, and decreases the lender’s risk. A larger down payment can sometimes help you qualify for a better rate.
How Interest Rates Vary by Credit Score
The gap between what a strong borrower pays and what a weaker borrower pays is enormous. Based on Experian data from late 2025:
- 781 to 850 (super prime): 4.66% new, 7.70% used
- 661 to 780 (prime): 6.27% new, 9.98% used
- 601 to 660 (nonprime): 9.57% new, 14.49% used
- 501 to 600 (subprime): 13.17% new, 19.42% used
- 300 to 500 (deep subprime): 16.01% new, 21.85% used
To put that in dollars: on a $30,000, 60-month new car loan, a borrower at 4.66% pays about $3,641 in total interest. A borrower at 13.17% pays roughly $10,849 for the same loan amount. That’s a $7,200 difference driven entirely by credit score. If your score is on the lower end, spending a few months improving it before you buy can save thousands.
What Happens When You Pay Off the Loan
Once you’ve made every payment, the lender releases its lien on the vehicle and you receive the title. The car is yours free and clear. Some states mail you a new title automatically, while others require you to visit the DMV to have the lien removed from the title record.
Most car loans have no prepayment penalty, meaning you can pay the loan off early without extra fees. Making extra payments toward the principal can shave months off the loan and reduce total interest. Before doing this, check your loan agreement to confirm there’s no prepayment charge, as a small number of lenders still include one.