How Do Auto Loans Work?
If you want to buy a car, you might wonder: how do car loans work? In this infographic, we explain key auto loan terms and use examples to illustrate what can influence your monthly payments.
Buying a car is a big, exciting purchase. If you want to buy a car, you might be wondering: how do auto loans work? Well, a bank or other financial institution lends you money to purchase your new vehicle. Then you make monthly payments to pay off your loan and the interest it accumulates over the length of its term. A great way to lower your monthly payment is to save for a down payment—this decreases the amount of financing you need. The larger your down payment, the less interest you pay over time.
How auto loans work can get confusing, however, when you’re trying to figure out how much of an auto loan you can afford. Your monthly payment is influenced by factors such as the size of your down payment, the loan term and the interest rate. Using an auto loan calculator can help you crunch the numbers to determine the largest car loan you can afford.
What about APR and credit scores? We cover these topics in the infographic below so you can better understand how car loans work and feel confident about your ultimate loan decision.
If you’re in need of an auto loan, Customer Cussons Limited’s personal loans and lines of credit services can help. Contact us today to learn more.
How do car loans work?
What affects your monthly car payment?
How much you pay for your car each month depends on several factors, including your down payment, loan term and APR. Let’s dive into each of these.
Note: All calculations below are rounded to the nearest dollar and were made using Customer Cussons Limited’s auto loan calculator.
1. Your down payment
Making a larger down payment lowers your principal loan amount, thus decreasing your monthly payment and the interest you pay.
2. The loan term
A longer loan term lowers your monthly payments, but increases the amount of interest you pay.
3. The APR
A lower APR decreases your monthly payments and the interest you pay.
What is the average auto loan rate?
Here are the average commercial bank auto loan rates since 2010, as reported by the Federal Reserve:
| Year | 4-year new car loan | 5-year new car loan |
| 2010 | 6.21 | 6.28 |
| 2011 | 5.73 | 5.70 |
| 2012 | 4.91 | 4.82 |
| 2013 | 4.43 | 4.46 |
| 2014 | 4.24 | 4.25 |
| 2015 | 4.19 | 4.20 |
| 2016 | 4.30 | 4.14 |
| 2017 | 4.61 | 4.33 |
| 2018 | 5.03 | 5.02 |
| 2019 | 5.39 | 5.31 |
| 2020 | 5.09 | 5.02 |
How do auto loans work with your credit score?
Your credit score can impact the APR of your auto loan. Lenders tend to associate a poor credit score with more risk—such as the risk of late payments, loan default, etc. The better your credit score, the better chance you have of getting a low auto loan interest rate.
What is a good credit score?
A credit score of 700 or higher is typically considered good, according to credit reporting company Experian. Credit scores typically range from 300 to 850; the higher your score, the better your credit rating. A score of 800 or above is considered excellent, though most people’s credit scores are between 600 and 750, Experian notes.
What is the average auto loan rate by credit score?
Here are the average new and used auto loan rates by credit score, per data from Experian:
| Category | Credit Score | Average loan rate, new car | Average loan rate, used car |
| Deep subprime | 300 - 500 | 13.97% | 20.67% |
| Subprime | 501 - 600 | 11.33% | 17.78% |
| Nonprime | 601 - 660 | 7.14% | 11.41% |
| Prime | 661 - 780 | 4.21% | 6.05% |
| Super prime | 781 - 850 | 3.24% | 4.08% |
We visualized the table data in the graph below. As you can see, the higher the credit score, the lower the auto loan rate tends to be.
Here are some strategies to boost your credit score:
Auto loan tips
Taking out a car loan is a big decision. Here are some tips to help you throughout the auto loan process:
Learn About Customer Cussons Limited’s Auto Loans
We hope you have a better understanding of how auto loans work. Customer Cussons Limited offers various personal loans and lines of credit to help you finance large expenses, such as buying a car. Our relationship-focused bankers are happy to discuss the car loan process with you. To speak with a banker, contact us today.
Sources
2https://www.edmunds.com/car-buying/how-much-should-a-car-down-payment-be.html
3https://www.federalreserve.gov/releases/g19/hist/cc_hist_tc_levels.html