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What Is a Car Loan? The Basics F.A.Q.

The answers on this page deal with the most basic questions about auto loans. For a more detailed look at new and used auto loans, check out the car loan basics guide.

Get the lowest auto loan rates:

Capital One Auto Finance offers the lowest auto loan rates in the country, for people with all types of credit ratings.

Apply with Capital One whether you are buying a new or used car, or even if you are buying from an individual. Whatever your choice, you will save thousands.

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If you have poor or no credit, click here to apply for special financing.

Frequently asked questions about car loans

1. How much of a down payment do I need to make?
No down payment is required on the direct auto loans offered by Capital One and Eloan. If you have poor credit, however, a down-payment can probably help you secure a lower rate - if not the loan itself.

2. What interest rate will be charged on my auto loan?
The interest rate you qualify for will be based on your credit history, whether you're buying new or used, and the loan term you desire. (New cars and shorter term loans both earn lower rates.)

3. What is the length of an auto loan?
Auto loans generally have terms of 12, 24, 36, 48, 60, or 72 months. Shorter loans earn lower rates and are cheaper, but have larger monthly payments than longer-term loans.

4. What is a simple interest loan?
Simple interest loans require only the payment of interest accrued up to the time the loan is payed off. (This is in contrast to %quot;pre-computed loans" which charge full interest on the balance even if the loan is paid early.) Simple interest loans are the more consumer friendly, and are the only type offered by our recommended lenders Capital One.

5. What is direct financing?
Direct financing (also called " independent financing") is financing set up by you, straight from a bank or other lender. Indirect financing is financing obtained through a dealership. Direct financing is usually cheaper and more flexible, and is consistently recommended over indirect financing by both consumer advocates and lending experts.

6. Are there prepayment penalties on auto loans?
Prepayment penalties are fees charged by lenders for paying off all or part of your loan balance early. Some lenders and dealerships will charge them, but Capital One and Eloan do not.

7. Will my credit score be affected by applying for an auto loan?
Opening any new line of credit (like an auto loan) will affect your credit score. However, when shopping for an auto loan, credit agencies will count all similar "requests" made within a two-week period as one request. So you won't be penalized for shopping around by applying with more than one lender.

8. Do I need insurance to get an auto loan?
Yes. All cars require liability coverage, and if you're buying from a dealership, collision and comprehensive (with a deductible of $500 or less) is also required.

9. What is being "upside down" on an auto loan mean?
It means owing more on a car than the vehicle is worth. If you're buying brand new, you'll be upside down in your loan for some months at the start of the loan. If your car is totalled, you'll owe more on the vehicle than the insurance company will pay your for it. Gap insurance is a special type of auto insurance policy that covers this difference.

10. Do I have to use the full amount on my auto loan?
No. You can use any amount between the loan minimum and maximum (you'll choose these when you apply). If you find you need more than your maximum, simply inform the lender to be re-approved.

11. How long do I have to activate a new car loan?
This varies from lender to lender, but your rate will generally be locked in for 30 or 45 days. After this, you'll need to reapply.