Intro to Auto Loans

Auto loan basics

For many teens, an auto loan is the first type of credit they get and their first debt to repay. You use an auto loan to buy a car.

• Auto loans are secured credit.
• The car or truck (vehicle) you buy is the collateral.
• If you don’t pay your auto loan on time, the lender can repossess your vehicle. They send someone to your house and take the vehicle back.

Cars cost thousands of dollars—most times, it’s tens of thousands. The average price for a new vehicle in the U.S. is over $48,000. So, it’s not cheap.

A common way to buy a car is to get a loan. You get the car now and pay for it over time.

How auto loans work

Auto loans can be used to “finance” the purchase of a car when you can’t pay for the car in cash.

• Any car or truck you want will have a purchase price.
• You can make a down payment, which is money that you have in cash to pay for the car.
• Your auto loan amount will equal the purchase price of the car minus any down payment you make.
• Your auto loan will have a set term, which is the number of months or years you have to pay back the loan.
  • Common auto loan terms range from 2 years (24 months) up to seven years (84 months).
• You will pay the loan back with fixed monthly payments over the term of the loan. Fixed means the monthly payments are always the same.
• Each month when you make a payment, it will pay down part of the loan (called the principal) as well as the monthly interest charges.
• If you do not make a payment by the due date, late fees will be charged. The lender also has the right to repossess the vehicle – even after just one missed payment!

Smart Money Tip: Save up for your first vehicle

Even though there are auto loans that let you purchase a car with “no money down” (no down payment), these are more expensive in the long run because you end up financing a larger amount. That means paying additional money in interest.

It’s always a smart idea to save up as much money as possible to put towards the largest down payment possible.

More tips for managing auto loans

• As a teen, it will be easier to qualify for an auto loan at a low interest rate if you have a cosigner.
• Ask your parent or guardian to cosign the loan, letting them know you are committed to making the payments.
• It’s a good idea to get “pre-approved” for an auto loan before you start shopping for a car.
• You can get pre-approved for the loan with your bank.
• This will let you know how much car you can afford to buy.
• If you buy a car from a dealership, they will offer you auto loans through their financing department.
• Things like “no money down” and “0% interest for X months” can sound like a good deal, but they may end up costing more.
• Always compare dealer offers to the pre-approved loan offer you have from your bank.
• Read the fine print on your auto loan contract.
• You want to avoid things like “early repayment” or “prepayment” penalty fees. These make you pay a fee if you try to pay the loan off early.