- Auto Loans are Big Business: Auto loans are a significant part of the financial industry. In the United States alone, outstanding auto loan debt surpassed $1.37 trillion in recent years, making it one of the largest categories of consumer debt.
- Longer Loan Terms are Increasing: The average length of auto loans has been increasing steadily. While 5-year (60-month) loans used to be common, 6-year (72-month) and even 7-year (84-month) terms are becoming more prevalent. This trend can lower monthly payments but increase the total interest paid over the life of the loan.
- Subprime Borrowers Face Higher Rates: Borrowers with lower credit scores (typically below 620) often face significantly higher interest rates compared to those with better credit scores. This can result in substantial differences in the total cost of financing a vehicle.
- Interest Rates Vary by Vehicle Type: Interest rates for auto loans can vary based on the type of vehicle being financed. New cars generally have lower interest rates compared to used cars, which may reflect higher perceived risk by lenders.
- Leasing is Popular: Leasing has grown in popularity, particularly for new vehicles. Leasing allows consumers to drive a newer car with lower monthly payments compared to purchasing, but it comes with mileage restrictions and does not build equity in the vehicle.
- Online Financing Options are Increasing: Consumers now have more options than ever to secure auto financing online. Online lenders and platforms offer convenience, competitive rates, and the ability to compare multiple offers quickly.
- Financing Can Include Add-Ons: Some auto loans include financing for additional products such as extended warranties, gap insurance, or vehicle protection plans. These add-ons can increase the total amount financed and monthly payments.
- Preapproval Can Save Time and Money: Getting preapproved for an auto loan before shopping for a car can streamline the buying process. It provides a clear budget, allows for better negotiation on price, and reduces the pressure to accept dealer financing.
- Refinancing Can Save Money: Borrowers who have improved their credit scores or found better interest rates may benefit from refinancing their auto loans. Refinancing can lower monthly payments, reduce interest costs, or shorten the loan term.
- Balloon Payments Exist: Some auto loans, especially those with longer terms, may include a balloon payment at the end of the loan term. This large, final payment can catch borrowers off guard if they haven’t planned for it.
Understanding these facts can help consumers make informed decisions when navigating the auto financing process, ensuring they secure the best possible terms for their individual financial situations.
