How do auto loans work?


How do auto loans work?


So how do auto loans work? Since most people buying a new or used car opt for financing it’s an important question, and understanding the answer will help you in the purchase process.

To summarize, you take out a car loan with a lender to pay for the purchase of a vehicle and, by signing the loan contract, agree to pay back the money in installments over the course of the loan, according to its terms.

These terms include key factors like the finance charge, loan duration and the size of the monthly payment.

Most auto loans are simple interest loans. Your monthly payment is made up of principal, the amount you borrowed to buy a vehicle; and interest, the fee paid to the lender for borrowing the principal. In turn, the size of this payment is shaped by the loan term, which is the time you have to pay back the loan, normally 36 – 72 months.

Payments can include a larger amount of interest at the beginning of the loan and then switch to a larger amount of principal as you get closer to the payoff date.

It’s worth noting that precisely when you make your payments during the course of the month can affect how much principal and interest gets paid.

Pay early and more of that payment goes to the principal balance. Because the lender doesn’t have to wait as long as expected to get its monthly installment, the interest is less. If you pay on time you’ll pay exactly the amount of interest agreed at signing. Pay late and more of that monthly payment is going towards interest.

The interest, together with any lender fees for providing the loan, get wrapped up into the APR – the annual percentage rate for your loan.

What are your options for getting an auto loan?

Choices include:

Indirect lenders

  • Dealerships – Offering vehicles and loans under one roof, they’re convenient places for finance but rates may be higher than other options.

Direct lenders

  • Banks and credit unions – The open hours of these brick and mortar premises may not be as convenient as dealerships and online lenders, but they offer low-pressure environments to seek financing.
  • Online lenders – These financial institutions provide both a convenient and low-pressure way to apply for an auto loan in your own time.

Online lender RoadLoans, part of Santander Consumer USA, offers several advantages here.

In one quick and easy process, you can apply online whenever it suits you, and receive a decision in seconds. If approved, print and take your loan packet to a dealership and shop with confidence, knowing your financing is already covered. RoadLoans accepts applications from people with all types of credit, including those with bad credit* and with no credit history.

What affects your interest rate?

Many factors can affect the interest rate on a car loan. Here are some common ones:

  • A major factor is credit score. It informs lenders how much risk they are taking by lending to you.
  • Another is the loan term and, generally, shorter loans offer lower interest rates as lenders get their money back quicker. However, a short loan term might mean higher monthly payments.
  • A vehicle’s age also plays a part. New car loans typically have lower interest rates than those for used cars.
  • Money down counts, too. You may get a lower rate by showing your commitment to the purchase with a sizeable down payment.

Buying a car? Apply for an auto loan online with RoadLoans.


* “Bad” or “Poor” credit generally is considered a FICO score around 600 and below by sources including the Consumer Federation of America and National Credit Reporting Association (reported by the Associated Press),,, Investopedia, and others. The Congressional Budget Office identifies a FICO score of 620 as the “cutoff” for prime loans. FICO scores are not the sole factor in lending decisions by and Santander Consumer USA.


Written by:

Competitive Rates

Lower your monthly car payments by applying for a car loan with

Apply for a Loan

*View disclosures & offer information
Dodge Charger