Auto Loan

Auto loans are offered by banks, credit unions, specialist lenders and car dealerships. Because the vehicle acts as collateral, the lender can repossess it if the borrower stops making payments.

The terms usually range from three to seven years. Longer terms lower the monthly payment but increase the total interest paid. For example, borrowing 25,000 at 7% over five years means monthly payments of about 495 and total interest of about 4,700.

Interest rates depend on the borrower's credit history, the size of the deposit, the age of the vehicle and the length of the loan. New cars often qualify for lower rates than used cars, and manufacturers sometimes offer promotional rates through their own finance companies.

Cars lose value quickly, especially in the first few years. If the loan is large and the term is long, the borrower can owe more than the car is worth, which is called negative equity. Other ways to finance a car include leasing and, in the United Kingdom, personal contract purchase and hire purchase agreements.