How Does an Auto Loan Work? [Infographic]

How Do Auto Loans Work

Buying a car is a big, exciting purchase. If you want to buy a car, you might be wondering: how do auto loans work? Well, a bank or other financial institution lends you money to purchase your new vehicle. Then you make monthly payments to pay off your loan and the interest it accumulates over the length of its term. A great way to lower your monthly payment is to save for a down payment—this decreases the amount of financing you need. The larger your down payment, the less interest you pay over time.

How car loans work can get confusing, however, when you’re trying to figure out how much of an auto loan you can afford. Your monthly payment is influenced by factors such as the size of your down payment, the loan term and the interest rate. Using an auto loan calculator can help you crunch the numbers to determine the largest car loan you can afford.

What about APR and credit scores? We cover these topics in the sections below so you can better understand how car loans work and feel confident about your ultimate loan decision.

Contact Cadence Bank today

We’re here to make financing a car easy. Find out more about Cadence Bank’s auto loan offerings and get in touch with us today to learn more.


Key auto loan terms

Principal: This is how much you borrow to purchase your vehicle, excluding taxes, fees and interest.

Average new car loan amount1


Average used car loan amount1


Down payment: This is how much you pay upfront for your vehicle. A larger down payment lowers your monthly payments and the interest you pay over time.

Average auto loan down payment2


APR: The annual percentage rate is the interest rate you pay for your loan. It can be influenced by your credit score.

Loan term: The loan term is how long you have to pay back your auto loan. For example, your loan could have a 48-month (4-year) or 60-month (5-year) term.

Average auto loan term1

67.91 months = Roughly 5 ½ years

Total cost: The total cost of your vehicle equals the principal loan amount plus interest you pay throughout the loan term.

$25,000 principal + $4,000 interest = $29,000 total cost


Average Auto Loan Rates Since 2019


What affects your monthly car payment?

How much you pay for your car each month depends on several factors, including your down payment, loan term and APR. Let’s dive into each of these.

Note: All calculations below are rounded to the nearest dollar and were made using one of Cadence Bank’s auto loan calculators.

1. Your down payment

Making a larger down payment lowers your principal loan amount, thus decreasing your monthly payment and the interest you pay.


2. The loan term

A longer loan term lowers your monthly payments, but increases the amount of interest you pay.


3. The APR

A lower APR decreases your monthly payments and the interest you pay.




What is the average auto loan rate?

Here are the average commercial bank auto loan rates since 2016, as reported by the Federal Reserve:

Year 5-year new car loan 6-year new car loan
2016 4.14 4.09
2017 4.33 4.49
2018 5.02 5.12
2019 5.02 5.21
2020 5.31 5.36
2021 4.82 4.82
2022 5.24 5.49
2023 7.72 7.63

How do auto loans work with your credit score?

Your credit score can impact the APR of your auto loan. Lenders tend to associate a poor credit score with more risk—such as the risk of late payments, loan default, etc. The better your credit score, the better chance you have of getting a low auto loan interest rate.

What is a good credit score?

A credit score of 700 or higher is typically considered good, according to credit reporting company Experian. Credit scores typically range from 300 to 850; the higher your score, the better your credit rating. A score of 800 or above is considered excellent, though most people’s credit scores are between 600 and 750, Experian notes.

What is the average car loan interest rate by credit score?

Here are the average new and used car loan rates by credit score, per data from Experian:



4 ways to improve your credit score

Here are some strategies to boost your credit score:


How to get a lower interest rate on a car loan

Taking out a car loan is a big decision. Here are some tips to help you throughout the auto loan process:


Learn About Cadence Bank’s Auto Loans

We hope you have a better understanding of how auto loans work. Whether you’re shopping new, used or just refinancing, Cadence Bank offers auto loans to get you moving in the right direction. Our relationship-focused bankers are happy to discuss the auto loan process with you. To speak with a banker, contact us today.





This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.

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