What is an auto loan?

An auto loan is a type of secured installment credit specifically for purchasing a new or used vehicle. The vehicle itself serves as collateral — the lender holds a lien on the title until you pay off the loan. Once the final payment is made, the lien is released and the title transfers fully to you.

How auto loan rates are determined

Your interest rate depends primarily on your credit score, the loan term, whether the vehicle is new or used, and the lender type. New vehicles typically qualify for lower rates than used ones. Longer terms (72 or 84 months) lower the monthly payment but increase total interest paid. Shorter terms cost more per month but less overall. The CFPB's auto loan resources walk through what to compare when shopping lenders.

Dealer financing vs. direct lending

Direct lending means you secure a loan from a bank, credit union, or online lender before visiting the dealership. You arrive with a pre-approved rate and use it as a negotiating baseline. Capital One Auto Navigator is a direct-lending example built around soft-pull pre-qualification — you see a personalized rate before it affects your credit. Dealer financing means the dealership arranges financing through its network of lenders — convenient, but the dealer may mark up the rate above what the lender actually offered. A big-bank dealer-channel program like Chase Auto Finance shows how that trade-off plays out in practice — rate isn't competitive without an existing banking relationship, but the dealer-network convenience is real. A third model, captive financing, ties the loan to a specific retailer's own inventory — how Carvana's financing works is a useful example of the trade-offs (soft-pull pre-qualification and convenience, but the loan only applies to that retailer's cars). The CFPB recommends shopping for financing before visiting a dealer so you have a comparison point — see our picks for the best auto loans of 2026 to start comparing direct-lending rates.

Key terms to understand before you sign

• Principal: The amount you're borrowing (purchase price minus down payment).
• APR: The annualized cost of the loan including the interest rate and any lender fees.
• Loan term: How many months you have to repay — common terms are 36, 48, 60, 72, or 84 months.
• Lien: The lender's legal claim on the vehicle title until the loan is paid in full.
• Prepayment: Most auto loans allow early payoff without penalty — confirm before signing.

What happens if you default

Because the vehicle is collateral, the lender can repossess it if you miss payments — often without a court order, depending on state law. Repossession is reported to the credit bureaus and can significantly damage your credit score. The FTC's guidance on vehicle repossession describes your rights if a lender moves to repossess.

Current pricing gives a concrete benchmark to check any dealer quote against: the Fed's G.19 release puts commercial-bank rates at 7.14% average auto loans on 60-month paper and 6.97% average auto loans on 72-month paper as of May 2026 — a reminder that stretching the term barely moves the rate, so the total-interest math almost always favors the shorter term if your budget can carry the higher payment.