The Complete Guide to Auto Loans

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Despite the pandemic changing many Americans’ daily routines, auto debt in the country is at an all-time high.  According to Experian, the total balance of consumer auto loans in 2020 grew to a record high of $1.37 trillion.

What Are Auto Loans?

So, how do auto loans work and why would you need one? In simple terms, an auto loan is a secured loan that must be used to purchase a vehicle. The vehicle you purchase acts as collateral, meaning the worth of your vehicle is used as security for the lender.

Auto loans are different from other types of loans, like personal loans, because the money you receive must be used towards purchasing a vehicle.

For this reason, interest rates on auto loans are generally lower than other types of loans.

An auto loan is an installment loan, meaning you have a certain period of time in which you need to pay back what you borrowed. On average, auto loans range from three to five years.

Before applying for an auto loan, it’s vital to know what your options are so you can make an informed decision based on your financial situation and lifestyle.

Buying a Car vs. Leasing a Car

One of the first questions you should ask yourself is if you want to buy or lease your next car. Even though they both will allow you to get a car, they are not the same by any means.

Leasing a car is comparable to renting a house. You do not own the vehicle, but instead, you pay a monthly fee to rent the car for an agreed-upon period of time. Buying a car is akin to owning a home. You own the vehicle outright and make periodic payments to pay off the balance of your auto loan.

For you to make the best possible decision, here are some pros and cons for both options.

The Pros and Cons of Buying a Car

On average, the monthly loan payment for a new car is quickly approaching $600. For used cars, monthly payments tend to be less. Here are some points to consider before leaping into an expensive auto loan.


1. No Mileage Limits

When you buy a vehicle, there aren’t limits to how much you can drive, as there are with leases.  You can put as many miles on your vehicle as needed.

2. No Charges for Wear and Tear

Since you’re buying the car, you will not be required to keep the car in a certain condition. This is especially great for people with children or animals that they will need to transport in the car.

3. Freedom to Sell or Modify the Car

You can also sell or trade in the vehicle, make changes to the color, the interior, the exterior, etc. without worrying about additional fees.

Buying a car tends to be a good option for those who want true ownership of the vehicle. However, that’s not to say that there aren’t some downsides to consider.


1. Higher Monthly and Down Payments

On average, the monthly payments are higher in most cases when you compare them to leasing a car. There will most likely be a larger down payment required as well.

2. Long-Term Maintenance Costs

If you buy a car and plan on having it for a long time, there will most likely be a few costly repairs that will need to happen at some point.

The Pros and Cons of Leasing a Car

According to Investopedia, the average car lease payment is around $460 per month. That’s significantly lower than monthly payments if you were to buy the car. Here are some things to consider.


1. Lower Monthly Payments

As mentioned before, it’s almost guaranteed that you will have a lower monthly payment than if you were to buy the same car instead of leasing it.

2. Lower Fees, Down Payments, and Repair Costs

The fees for driving off the lot tend to be lower, and in some cases, you might not need to have a down payment at all! The warranty on the car will last through the lease, which makes car repairs cheaper.

3. Newer Models are More Affordable

Leasing makes it easier and more affordable to drive newer cars. When you buy a car with the same budget, you may need to settle for an older car.

Leasing a car may be a great alternative for those looking for less of a commitment when it comes to monthly payments and repairs. However, there are some drawbacks to consider as well.


1. Mileage Restrictions and Fees

There are mileage restrictions on how many miles you can put on the vehicle each year. Additional fees can be charged for going over the mileage, and there could be other fees, as well, such as terminating the lease early.

2. Additional Insurance

In some cases, additional insurance is needed to ensure there is enough to cover the vehicle. Before you lease, make sure you know if there will be any extra insurance requirements.

3. Vehicle Switching

Once the term of the lease is over, you will have to get a new vehicle. This could be a new lease, or you might want to finance the vehicle that you were leasing and buy it.

Which Option is Better for You?

You want to consider these pros and cons before taking out a loan or applying for a lease. At the end of the day, you’re the person that’s responsible for weighing your options and deciding what’s in the cards for you.

Two main factors to consider are the costs and your flexibility. For both buying and leasing, you need to know what the monthly payments will be and if that’s something you can work into your budget.

In addition to the costs, you also have to consider your flexibility. Will you want to customize your car? Do you travel long distances often? Those who want lower monthly payments and who do not tend to drive a lot may find that leasing is a better option for them.

No matter which option you go with, you will be able to drive a car from point A to point B. Make sure to take your time and contemplate which option is best for you.

How to Get an Auto Loan With Bad Credit

Look, we can’t all have perfect credit and get top-tier interest rates. For millions of
Americans, bad credit prevents them from being able to obtain major life purchases like a car or a house.

If you have credit that needs some work, getting a car is not entirely out of the question. However, there will be some extra steps in the process.

Where to Get a Loan for a Car When You Have Bad Credit

The good news is that you have more borrowing options than you might think, even with problematic credit. Here are four common ways to get an auto loan:

1. Dealer-Arranged Financing

In some cases, dealer-arranged financing can help you get a loan. A lot of car dealers have lenders they work with that can attempt to provide the loan needed for the vehicle.

When you apply, you might get several options from different lenders, then you can choose the one that works best for your needs. This option works great for those who have fair credit (a FICO score of roughly 620 – 679).

2. Captive Financing

Captive financing is done directly through the car dealership you are buying from. Dealers will often provide this type of financing for new vehicles, but they don’t always offer it for used cars.

Because the dealers want to move the vehicles off their lot, they are more likely to provide financing, even if you have less-than-perfect credit.

3. Buy Here, Pay Here

Some dealers that offer this type of financing tend to work with people with bad credit quite often. Like the previous option, there are no outside lenders involved. Instead, the dealers take care of the financing of the vehicles they sell.

While this can be a way that someone with bad credit can get a vehicle, there are often high interest rates and large down payments involved. The selection of vehicles are often used, as well.

4. Traditional Banks and Credit Unions

You can always stop by your bank or credit union and inquire about a loan to go towards your next vehicle. Even if you have credit that needs work, it doesn’t automatically mean that you won’t get a loan.

If you have credit that you consider questionable, but it’s still around 650 or 670, it may be worth your time to try to get a traditional personal loan. If this option sounds like a possibility, here are more Advantages to Using a Personal Loan.

Steps to Take Before Getting an Auto Loan with Bad Credit

Before you jump into getting a high interest auto loan, consider taking some time out to improve your chances of getting a loan with more favorable terms. It may save you thousands in the long run!

Here are three tips to consider before applying for an auto loan:

Tip #1: Improve Your Credit Score

If time is on your side, spend a few months working on improving your credit score. Even though you can get a car with bad credit, you have to remember that it’s not just about finding a lender that will say yes.

The better your credit score is, the lower your interest rate will be. Start by requesting a free copy of your credit report and see what areas you can improve on. To start, make sure you are paying your bills on time. Your payment history accounts for 35% of your total FICO score.

Tip #2: Know What You Can and Can’t Afford

This is a big one. Although you might want a brand-new luxury vehicle, you must consider the overall costs. If you can’t afford that type of vehicle, it’s best not to get in over your head.

If you want to improve your chance of getting a loan with bad credit, you can’t ask for a large $30,000 loan for a vehicle. It’s more reasonable to get a $10,000 loan that can help buy a used vehicle. It will be easier for you to pay off, too.

Tip #3: Come Up with a Large Down Payment

Whether you are buying a new or used vehicle, you will need to have some type of down payment. The only time you wouldn’t need a down payment would be if you have enough money to buy the vehicle outright.

The down payment goes directly towards the purchase of the vehicle. If you have $2,500 that you put down and are buying a used vehicle for $7,500, you will only have to finance $5,000. The more money you can put down on the vehicle the better.

For more regarding getting a car loan with bad credit, be sure to check out this article for a complete breakdown: Can I Get a Car Loan with Bad Credit?

Automobile Repossession 101

Now it’s time to talk about the dark side of auto loans… which is what happens when you cannot make your monthly payments. The dreaded auto repossession.

As mentioned earlier, when you finance your vehicle, you get a secured loan. This means that the vehicle is the security in the loan, and the lender has certain rights to the vehicle until you have repaid the loan in full.

If you miss car payments and don’t contact the dealer to see if you can make up those payments, there is a good chance that they will repossess the car. This means that they can come to your home and take the vehicle because you have technically defaulted on the loan.

How the Repossession Process Works

Since the laws can vary state-by-state, this is just a basic overview of the steps that are typically taken during repossession.

Step 1: Late Payment Notification

It will usually begin by getting notified by the lender that your payment for the vehicle is late. Some lenders will even provide you with a second late payment notification.

Since you are late on payments, you are technically in default, which means that the vehicle can be taken by a repossession company.

Step 2: Notice of Repossession

You will then receive a notice about the repossession and will be told what your rights are in the situation. In some cases, you may be able to get the vehicle back if you make up your back payments and pay the repossession fees.

Step 3: Vehicle is Repossessed and Sold

If you do not choose to make up your back payments, the creditor will repossess and sell the vehicle at an auction.

Step 4: Money from the Sale Will Pay Off What is Owed

The money that’s received from the sale of the vehicle will then be used the pay off the amount owed on the vehicle.

If the sale auction covers the cost, you will not have to pay any of the balance because it will be wiped out. However, if there is a balance, you will have to pay that deficiency.

What to do if You Can’t Pay

If you’re like millions of people in America who are living paycheck to paycheck, it can make it difficult to afford a car payment each month. Here are a few things you can do to try to prevent auto repossession from happening.

Get in Touch with Your Creditor

One of the first actions to take is to contact your creditor. You will want to ask them if it will be possible to have a grace period or if you could change the payment schedule. If you get in touch with them early, there’s a better chance you may be able to work something out with them.

If they do agree to a grace period or change in the payment schedule, make sure you get those agreements in writing.

Voluntarily Give the Vehicle Back

Voluntary repossession may be a good option (given the circumstances). When you give the vehicle back, it can reduce the lender’s expenses for repossessing the vehicle. However, this doesn’t necessarily mean that late payments and repossession will not show up on your credit report.

Sell the Car Yourself

Another option is to sell the car yourself. If you believe that you can get more money than the lender could get for the vehicle, you could use the money that you get to pay off the vehicle in full.

This will prevent you from having a repossession on your record, and you can then get a different vehicle that is more affordable.

What Are Car Title Loans and How Do They Work?

The final topic in this guide is all about car title loans. Once you own a car, you will receive a car title in your name signifying that you own the vehicle. Car title loans are when you use your car title as collateral in order to receive a lump sum of money.

These loans are typically short-term loans and come with hefty annual percentage rates (APR). Most of the time, car title loans will need to be paid back in 30 days, although the exact terms of the loan can vary.

When Would Someone get a Car Title Loan?

Oftentimes people think about getting a car title loan when they’re tight on cash and need money relatively quickly. They share several similarities to payday loans, which are actually one of the worst loans out there.

Car title loans can be appealing to those with bad credit because you’re able to secure the loan by using your car as collateral. You can also borrow more than the average payday loan. Instead of hundreds of dollars, you may be approved for a loan of a few thousand dollars.

How It Works

To get a car title loan, you will have to find a company that offers them and then apply for the loan. Some lenders will require that you provide your employment information and some personal details before providing you with the loan.

If you get approved for the loan, you turn over the title to your vehicle until the loan has been paid off in its entirety. If you do not pay off the loan, your car will belong to the lender, who will then take your car from you.

Can You Still Drive the Car?

When you have a car title loan, you can still drive your vehicle. The only thing the lender holds will be the title to the car, so you won’t have to worry about finding a way to and from work.

You must keep in mind that you have a limited amount of time to pay back that loan. If you don’t pay, you could be in a position where your vehicle is taken from you.

Other Options for Borrowing Money

Car title loans should never be your first, second, or even third option. They come with a lot of downsides. If you’re strapped for cash and need money relatively quickly, there may be other options that are a lot better.

Credit Cards

While everyone knows that overspending on credit cards can be a problem, they’re oftentimes better than car title loans because the interest is lower. While it’s not as low as you would find with a traditional personal loan, it’s not going to be in the triple digits like with car title loans.

Bank or Credit Union Loan

Another option is to talk with your bank or credit union about getting a personal loan through them. This can be difficult if you do not have good credit, of course, and it will take longer than getting a car title loan. However, it poses way less of a risk to you.

Family or Friends

They say that you shouldn’t borrow money from family or friends because it can cause problems down the road. However, those problems might not be as big as the possibility of losing your vehicle.

If people you know have the means and are willing to let you borrow, it could be a good option. Just make sure you pay them back on time and have a Friend or Family Personal Loan Agreement in writing.


For many Americans, choosing to get an auto loan is an extremely important and significant financial decision. Before you make a commitment, be sure to weigh all your options. You may have a lot more than you think!

Even if you have poor credit, you still have options out there. The main idea is to research what loans would work best for you, compare offers, and make sure that you make enough money to cover the costs. Otherwise, you may be in a position where your car may be repossessed by the lender.

For more financial information and advice, feel free to stay awhile and peruse our site!

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