Auto Loans

Auto loans are one of the most-shopped and least-understood consumer loans. Dealer financing markup alone costs American borrowers billions every year. This guide walks you through how approval works, where the traps are, and how to get the best possible deal.

Types of auto loans

• New car loans — lowest rates (dealers compete hardest), longest terms available (often up to 84 months).
• Used car loans — slightly higher rates than new, but you avoid first-year depreciation. Sweet spot: 2–4 year old certified pre-owned.
• Refinance loans — replace your current auto loan with one at a better rate. Most useful if your credit has improved since purchase.
• Lease buyouts — financing to purchase the vehicle at the end of your lease.

Dealer financing vs. credit union vs. bank

The dealer markup trap

When you finance through a dealer, they often "mark up" the interest rate the lender offers you. If the lender approves you at 6.5%, the dealer can offer you 8.5% and pocket the 2-point spread (sometimes capped by the lender, sometimes not). This is legal and extremely common.

The fix: have a pre-approved rate in hand before you negotiate. If the dealer can beat it, great — take their offer. If they can't, you already have a rate lock.

Credit score and auto approval

Auto lenders typically use a specialized score (FICO Auto Score) that weights your auto loan history more heavily than a standard FICO score. Here's how typical approval tiers look:

Key approval factors

• Loan-to-value (LTV). Lenders prefer you finance ≤100% of the vehicle's value. Financing 120% (the car plus tax/title/fees) is possible but expensive.
• Payment-to-income ratio. Most lenders want your auto payment under 10–15% of gross monthly income.
• Down payment. 10–20% down significantly improves your rate and approval odds.
• Loan term. 60 months is the sweet spot. Anything longer than 72 months is a red flag — you'll likely be underwater (owe more than the car is worth) for most of the loan.

The single best money-saving move

Walk into the dealership with a pre-approved loan check from a credit union or bank. The dealer now has to compete for your financing business. In our experience, this saves the average borrower 1.5–3 percentage points on their rate.

Refinancing an existing auto loan

If any of these apply, you may benefit from refinancing:

• Your credit score has improved 40+ points since the original loan
• Interest rates have dropped meaningfully since you borrowed
• You took dealer financing and suspect you were marked up
• You want to extend your term to lower monthly payments (read: this increases total interest cost)

Use our affordability calculator to model a refinance scenario before you apply.

Before you apply

1. Check your FICO Auto Score. Standard credit monitoring may not show it — some card issuers and auto lenders do.
2. Pre-approve with at least one credit union. Federal credit unions can't charge more than 18% APR.
3. Calculate your max budget. Cap your total auto spending (payment + insurance + gas + maintenance) at 15% of gross income.
4. Shop the car separately from the financing. Negotiate vehicle price first. Then — and only then — discuss financing.

Last reviewed: January 2026 · Rate ranges based on current market surveys.