Auto Loan Definition

An automobile loan is a loan obtained from a financial institution (such as a bank or finance company) for the purpose of buying an automobile; as such, the loan amount is secured against the auto itself. Automobile loans usually have a monthly repayment schedule and are amortized [definition of amortization] over a period of several years, commonly three to five. However, as the number of car buyers with negative equity (owing more than your car is worth when trading it in) have increased, longer terms are becoming popular in order to keep the monthly payments down and allow more buyers to qualify.

Regardless, it is not advisable for auto loans to extend beyond the reasonable expectation of the usable life of the vehicle. For example, it is not a good financial decision to obtain a five year loan to purchase a ten year old automobile with a typical usable life of twelve years. Owing three more years of payments on a vehicle that is no longer usable simply keeps you in a negative equity situation when you buy your next car. Don’t fall into this trap!

Automobile loans may be called "direct" or "indirect", depending upon the method of obtaining the loan. In a direct loan, the consumer obtains auto financing directly from a bank, lender or financial institution. In an indirect loan the automobile dealer acts as an intermediary in obtaining the loan. Indirect loans are often more convenient to obtain but can have a higher cost to the consumer. Easy financing offers are often easy for a reason. Be smart. Shop online or call your local bank in addition to evaluating your loan options at the dealership.

Finally, keep in mind that 0% APR [definition of APR] offers are not always made available to you with your best interests in mind. Typically, it is because an automaker has a surplus in inventory that needs to be moved and they would love for you to help them with their problem. The only question you should be asking yourself is: Do I really need a new automobile?