Auto Loans: Get the Rate Before You Get the Car

Dealer financing vs. a loan you bring with you

There are two ways to finance a car. With direct financing, you apply to a bank, credit union or online lender, get a decision with a maximum amount and an APR, and take that to the dealer. With dealer-arranged financing, the dealer collects your application, sends it to lenders it works with, and writes the contract, which it usually sells to one of those lenders.

The difference shows up in the rate. The lender quotes the dealer a buy rate, and the dealer can offer you a higher rate and keep part of the extra interest as payment for arranging the loan. The CFPB notes that bank and credit union loans tend to cost less for exactly this reason: you skip the dealer's markup.

What auto loans cost in 2026

Your credit score moves an auto loan rate more than almost anything else, and used cars cost more to finance than new ones at every level. The table below shows Experian's averages for the second quarter of 2026; its credit tiers use VantageScore 4.0, so they don't line up exactly with the FICO bands used elsewhere on this site.

The average new-car loan in that quarter was $43,610 and the average used-car loan $27,852. For a second benchmark, the Federal Reserve reports that commercial banks averaged 7.17% on 72-month new-car loans in August 2026. If your quote sits well above the average for your tier, ask why, and compare it with at least two other lenders.

Long terms and negative equity

Average terms have stretched to about 69 months for new cars and 68 months for used ones. A longer term lowers the payment, but you pay interest for more months and you stay "underwater", owing more than the car is worth, for longer. Here is the same $30,000 loan at 7.17%:

Going from 48 to 84 months saves about $265 a month and costs about $3,650 more in interest. It also sets up the next problem. If you trade in a car you're underwater on, the dealer can roll the unpaid balance into the new loan. The CFPB found that 11.6% of auto loans made from 2018 to 2022 included this negative equity, averaging $5,073 on new vehicles. Those loans averaged a 73-month term, a $626 payment and a loan-to-value ratio of 119%, and borrowers were more than twice as likely to be assigned to repossession within two years as those who traded in a car with positive equity.

In our example, adding $5,073 to the $30,000 loan over 72 months raises the payment from $513.92 to $600.83 and the interest from about $7,000 to $8,190. If you can, keep the old car until the balance is below its value, or pay the shortfall in cash.

Add-ons: gap coverage, warranties and credit insurance

After you agree on a price, the finance office usually offers extra products. Each one can be rolled into the loan, which means you pay interest on it for the whole term. The CFPB is clear that you generally cannot be required to buy an extended warranty, gap coverage or credit insurance to get the loan; if someone says otherwise, ask where the contract says so.

Before you sign, ask for the contract with and without each add-on and compare the totals. If you change your mind later, you can usually cancel and may be due a partial refund, especially if you pay off or refinance the loan early.

The new deduction for car loan interest

The One Big Beautiful Bill Act, signed in July 2025, created a federal deduction for interest on some car loans for tax years 2025 through 2028. You can claim it whether or not you itemize. The main conditions:

• The vehicle is new, for personal use, and had its final assembly in the United States (check the window label or the VIN with NHTSA's decoder). Used cars and leases don't qualify.
• The loan was taken out after December 31, 2024, and is secured by a first lien on the vehicle. Cars, minivans, vans, SUVs, pickups and motorcycles under 14,000 pounds count.
• The deduction is capped at $10,000 of interest a year and shrinks by $200 for each $1,000 of modified AGI above $100,000 ($200,000 for joint filers).
• You enter the VIN on your return. From 2026, lenders report the interest on Form 1098-VLI.

It is a deduction, not a credit. The first year's interest on our $30,000, 72-month loan is about $2,020; in the 22% bracket that saves roughly $440 in tax. That helps, but it shouldn't decide which car or loan you choose. The IRS issued proposed rules in December 2025, so check its current guidance before you file.

If you can't make the payments

Because the car secures the loan, missing payments puts it at risk quickly. The FTC explains that in many states a lender can repossess as soon as you default, without advance notice, as long as it doesn't "breach the peace", for example by using force or taking the car from a closed garage. The lender then keeps or sells the car, and in most states it can sue you for the deficiency: what you still owe after the sale, plus fees.

Call the lender before you miss a payment, not after. Many will move a due date or defer a payment. Our guide to a missed loan payment covers what to ask for, and some states let you reinstate the loan after repossession by paying the past-due amount and costs.

Before you sign

1. 1 Get a loan offer first from a bank, credit union or online lender, and know your maximum payment. The loan affordability calculator helps.
2. 2 Negotiate the car's price separately from the financing and your trade-in, so a lower payment can't hide a higher price.
3. 3 Compare APR, term and total of payments on the federal disclosure, not just the monthly payment. See how to compare loan offers.
4. 4 Strike add-ons you didn't ask for and check that the amount financed matches the agreed price, taxes and fees.
5. 5 Check for a prepayment penalty and ask for it to be removed, so you can refinance or pay off early. If rates fall later, see auto loan refinancing.

Common questions