What is an Auto Loan?

An auto loan is a lending product used for the purpose of purchasing an automobile. Auto loans are secured to the automobile upon purchase. This way lenders are afforded opportunities to recoup a loss with the property if the borrower is unable to pay. Habitual failure to make payments can lead to forfeit of the property and repossession of the automobile.

Impact to Credit Score

Auto loans are considered a good type of debt since they are secured to the automobile. In this case, having a secured loan is typically a good thing for your credit worthiness. Any debt that is secured is typically considered a good debt, regardless of the interest rate. You might not like a particular debt because it has a high interest rate but if it’s secured to collateral it’s still good debt with regards to credit.

Interest Rate

Auto loan interest rates can really vary based a consumer’s credit score and debt to income ratio. Auto loan interest rates can vary significant dependent on demand as well. If automobiles aren’t selling and demand for cars is low, interest rates will be more attractive. Interest rates are tied to demand more so than in the automobile industry compared to other industries since they are used as incentives to sell cars. Artificially low interest rates can sometimes dissuade consumers from paying down their auto loan early.

Auto Industry

The auto industry typically gives promotional offers in order to help sell more automobiles at times when there is surplus inventory. During these times interest rates may not be realistically set to market rates since they can be artificially lowered to draw in more customers. This occurs more often in the automobile industry than in other segments of the economy. In the mortgage industry for example, interest rates and homes tend to have an inverse relationship and mortgage will not go on promotion in order to entice more homebuyers. So, in this regard, mortgages and homes are not intrinsically linked like in the automobile industry and the relationship of an automobile and auto loan is a lot more unique. Auto loans are not provided by the seller of cars directly (usually) but that process can happen in house so there is a bit of blurring of lines. This is something that can often happen with consumer durables in general.

What’s the Difference Between an Auto Loan and an Auto Lease?

An auto lease is an option to rent or borrow an automobile for a given period of time. Initial leases usually run 3 years (although the terms can vary) and usually come with stipulations, including limited miles driven and what happens if damages to the car occur. An auto loan on the other hand is a loan to purchase the entire car. In either scenario you the car be brand new but with a loan you are looking to buy the car outright while you are not doing so with a lease option.