A car loan lets you pay for a vehicle over time. A lender pays the seller, and you repay the lender in regular payments that cover the amount borrowed plus interest. The vehicle normally secures the loan, which means the lender can take it back if the loan is not repaid as agreed.
Who offers car financing
- Banks and credit unions lend their own money, either directly to you or through a dealership.
- Dealerships arrange financing at the point of sale, usually by sending your application to one or more lenders.
- Manufacturers’ finance companies finance their own brand, usually through dealers.
- Brokers and referral websites do not lend. They connect you with businesses that do.
What makes up the cost
| Term | What it means |
|---|---|
| Principal | The amount you borrow: the price, plus tax and any financed fees, minus your down payment and trade-in. |
| Interest rate | The yearly charge on the balance you still owe. |
| APR | A yearly rate that also reflects certain mandatory charges, so different offers can be compared. |
| Term | How long you have to repay, in months. |
| Total cost of borrowing | Everything you pay beyond the principal: interest and required charges. |
From application to last payment
- You apply, and the lender reviews your income, existing debts and credit history.
- If approved, you receive the terms: amount, rate, term, payment and conditions.
- You sign the loan agreement. Read the cost-of-borrowing disclosure before you do.
- The lender pays the seller and registers its interest in the vehicle.
- You make payments until the balance is zero, and the lender’s interest is then discharged.
Things to check before you sign
- The APR and the total cost of borrowing, not only the payment.
- Every fee, and whether optional products have been added to the loan.
- Whether you can pay the loan off early and what that costs.