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Car Loans and Ownership

Read through our guides and information related to car financing across the U.S. We explore everything from bankruptcy to loan options and trade-ins.

Understanding Car Loans

Demystifying interest rates, costs, and financing options

Electric vs. Gas: The Long-Term Cost Showdown

Analyzing the lifetime ownership expenses of electric and gasoline vehicles

Navigating Car Ownership Costs

From transportation expenses to post-bankruptcy financing

Key Terms

Unpack the jargon: tap to reveal straightforward definitions

Equity

Equity is the difference between a car’s current market value and the outstanding loan balance.

APR

The Annual Percentage Rate (APR) is the additional cost you pay for borrowing money each year, including fees, expressed as a percentage.

Depreciation

Depreciation is a reduction in the value of an asset, like a car, over time, typically due to wear and tear.

Co-signer

A co-signer is someone who takes on the responsibility of paying back a loan on your behalf if you do not. This could be a parent, close family member, or friend.

Down payment

A down payment is an initial, upfront payment that you make towards the total cost of a car. The higher the down payment you put down, the less money you’ll need to borrow with a loan.

Interest rate

The interest rate on a car loan is the cost you pay each year to borrow money expressed as a percentage. Unlike APR, the interest rate does not include other fees.

Electric vehicle

An electric vehicle is any vehicle that is powered by an electric motor that draws electricity from a battery and can be charged from an external source.

Gas vehicle

A gas vehicle is a motor vehicle that is powered by a spark-ignited internal combustion engine, fuelled by gasoline.

Loan term or loan duration

A loan term or duration is the whole length of an auto loan which you will make repayments for, typically expressed in months.

Negative equity

If your car is worth less than the amount you still have left to pay on your auto loan, then you have negative equity. For example, if your car is only worth $6,000 but you still have $7,000 left to pay on your auto loan, you have negative equity of $1,000.

Loan-to-value ratio (LTV)

The loan-to-value ratio (LTV) is the total value of your loan divided by the actual cash value (ACV) of your car, usually expressed as a percentage. For example, if your car is worth $7,000 and your loan balance is $5,000, your LTV would be 71%.

Fuel efficiency

A car’s fuel efficiency is the measure of how much a car will convert energy from fuel into kinetic energy to travel. The more energy contained in the fuel, the greater the fuel efficiency of the car. Cars with greater fuel efficiency require less gas to travel a given distance.

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FAQ (Frequently Asked Questions)

Demystifying car financing and ownership: your questions answered

What factors affect car loan interest rates?

Interest rates on car loans can be impacted by several factors including your credit score, the down payment you make, the loan term, and external economic factors like inflation.

Does paying for car insurance build credit?

Paying for car insurance doesn’t directly build credit as these payments are not reported to credit bureaus. However, if you used a credit card to pay for your car insurance and paid it off on time, you could indirectly help build your credit by using your credit card and paying it off.

How does my credit score impact my car loan interest rate?

Typically, people with higher credit scores might be able to get lower interest rates on their car loans, while people with lower credit scores might pay more interest. Your credit score can also impact whether a lender will approve you for a car loan at all.

Is it possible to get a car loan with bad credit?

You can still get a car loan if you have bad credit, but you might pay more interest on your loan. There are some steps you can take to increase your chances of being approved for a car loan such as making a larger down payment, trading in an old vehicle, or asking someone you trust to co-sign the loan.

Can I get a car loan after declaring bankruptcy?

Yes, you can get a car loan after declaring bankruptcy, but getting approved might be difficult. Your credit score is one of the main factors lenders consider when deciding to accept you for a loan and bankruptcy can negatively impact your credit.

Some things you can do to improve your chances are to try to lift your credit score where possible, pay a higher down payment, and consider getting a cosigner for the loan.

What is voluntary repossession of a car?

If you’re struggling to make the payments on your auto loan, a voluntary repossession means you inform your lender that you can no longer make the payments and return your car. The lender can then sell the car and put the money towards your outstanding balance.

A repossession, even if it’s voluntary, counts as a default on your auto loan, and this may have a negative impact on your credit score and can remain on your credit report for up to seven years.

Is it possible to pay off my car loan faster than the agreed term?

Yes, you can pay off your car loan in a shorter time than your loan term by paying slightly more than your monthly repayment, making one-off large payments or via bi-weekly half payments instead of monthly ones.

Consider your financial situation before paying off your auto loan early, as it may benefit you more to pay off other debts with higher interest rates instead.

How Can I Pay Less Interest on a Car Loan?

Minimizing your auto financing costs

Car loan interest examples
  • 1. Compare multiple loan offers

    Before applying for a car loan, compare offers from different lenders and shop around for the best interest rate. This has the potential to save you a considerable amount of money on your total loan amount.

  • 2. Avoid long-term auto loans

    While longer-term loans could reduce your monthly payments, you’ll usually end up paying more in interest over the lifetime of your loan, so it’s best to avoid these if you can.

  • 3. Make extra payments

    If your loan uses the simple interest method, you may be able to pay extra money towards the balance of the loan, reducing the overall amount of interest you pay. This can also help you pay the loan off faster.

  • 4. Lift your credit

    Your credit score is one of the factors that impact the interest rate you’ll be offered by lenders when applying for a car loan. Having a good credit score can improve your chances of qualifying for an auto loan with a lower interest rate. If you can, consider taking steps to lift your credit score before you apply for a loan.

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Behind the Words: Our Expert Writers

Get to know the talented minds crafting our content

Jackie Lam

Jackie Lam, AFC®

A personal finance writer for nearly a decade, Jackie Lam covers money management, lending, insurance, investing, and banking stories. An AFC® accredited financial coach, she is passionate about helping freelance creatives design money systems on irregular income, gain greater awareness of their money narratives, and overcome mental and emotional blocks.

Her work has appeared in publications such as Bankrate, Time's NextAdvisor, CNET, Forbes, Salon.com, and BuzzFeed. She is the 2022 recipient of Money Management International's Financial Literacy and Education in Communities (FLEC) Award, and a two-time Plutus Awards nominee for Best Freelancer in Personal Finance Media.

Michelle Lambright Black

Michelle Lambright Black

Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. She is the founder of CreditWriter.com, an online credit education resource and community that helps busy moms learn how to build good credit and a strong financial plan that they can leverage to their advantage. Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many other outlets.

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