This guide walks you through the main types of auto loans and how to pick the one that fits your budget and credit.
Financing is how most Americans buy a car, and the auto loan type you choose shapes what you pay each month and over the life of the loan. Before you sign, it helps to compare auto loan offers side by side so you can match the loan structure to your situation.
Rates remain elevated but are starting to ease. Auto loan rates sit near multi-year highs while beginning to stabilize, according to the Federal Reserve's G.19 consumer credit data. That backdrop makes the loan type you pick, and where you borrow, matter more than usual.
Auto loans fall into a few overlapping categories: how the loan is secured, how your interest is calculated, where you borrow, and what you're financing. Most people start with a standard loan to buy a new or used car, then the details, collateral, interest method, and lender, determine what they actually pay. The sections below break down each choice so you can see which combination fits your circumstances.
A secured auto loan uses your car (or another asset) as collateral, while an unsecured loan does not. Because the lender can repossess the car if you stop paying, secured loans generally come with lower interest rates than unsecured ones.
Unsecured loans let you borrow without putting an asset on the line, so there's no repossession risk in a worst-case scenario. The tradeoff is a higher rate, and how much higher depends heavily on your credit standing.
Feature | Secured auto loan | Unsecured auto loan |
Collateral | Your vehicle or another asset | None |
Typical rate | Lower | Higher |
Risk to the lender | Lower | Higher |
Main risk to you | Losing the collateral if you default | Credit damage and possible collections |
Your auto loan interest is calculated one of two ways: simple interest, charged daily on your remaining balance, or precomputed, fixed up front for the full term. The method decides whether paying early actually saves you money.
With a simple-interest loan, interest builds daily on what you still owe, so paying the loan off early lowers your total interest, especially if there's no prepayment penalty. A precomputed loan locks in the interest and principal at signing, which makes budgeting predictable but means you can't save by paying ahead. Think of simple interest like a metered taxi that stops charging when you arrive, and precomputed like a flat fare set before you get in.
Simple interest | Precomputed | |
How interest accrues | Daily on your remaining balance | Fixed total set at signing |
Paying off early | Saves you interest | No interest savings |
Best suited for | Borrowers who may pay ahead | Borrowers who want a fixed budget |
You can finance directly through a bank or credit union, or indirectly through the dealer, and it's worth comparing both. Dealer-arranged (indirect) financing can include a markup on your interest rate, so getting a bank or credit union offer first gives you a benchmark, according to the Consumer Financial Protection Bureau.
In practice, borrowers use a mix of lenders. Banks funded the largest single share of auto loans in early 2026, followed closely by manufacturers' own lending arms, with credit unions close behind, per Experian's State of the Automotive Finance Market.
Lender type | Share of auto loans (Q1 2026) |
Banks | 28.42% |
Captive (manufacturer) lenders | 26.83% |
Credit unions | 20.09% |
Finance companies | 15.43% |
Buy-here-pay-here dealers | 9.24% |
Source: Experian, Auto Loan Rates and Financing, Q1 2026.
Yes, used-car loans usually cost more than new-car loans. Used-car borrowers paid almost double the interest of new-car borrowers on average in early 2026, according to Experian's rate data by credit score.
Your credit tier widens or narrows that gap. The table below shows average rates for new and used loans across credit tiers in Q1 2026.
Credit tier | New-car rate | Used-car rate |
Super prime | 4.55% | 6.30% |
Prime | 6.23% | 8.77% |
Subprime | 13.44% | 19.42% |
Deep subprime | 16.01% | 21.77% |
Overall average | 6.39% | 11.43% |
Source: Experian, average car loan rates by credit score, Q1 2026.
If your credit is bruised, you still have options, and plenty of borrowers are in the same spot. Some lenders run programs designed to help you borrow responsibly while you rebuild, and on-time payments can strengthen your score over time.
Expect to pay more up front. Deep subprime borrowers averaged 16.01% on new-car loans and 21.77% on used-car loans in early 2026, per Experian. A higher rate today doesn't have to be permanent: you can compare lenders that work with lower credit scores now and refinance later once your score improves.
Yes, you can finance a car bought from a private seller, though fewer lenders offer it. These private-party loans work more like personal loans, since the funds go to the seller rather than a dealer.
They often carry slightly lower rates and similar terms to personal loans, but expect extra paperwork. Lenders may require a mechanical inspection and vehicle documentation to protect their investment.
Yes, a lease buyout loan finances the amount you owe to purchase the car you've been leasing. It's well-suited to drivers who want to keep their leased car but would rather not pay the remaining balance in one lump sum.
The lender covers the outstanding lease amount and treats it like a standard auto loan you repay over time. If you're weighing this route, you can compare lease buyout loan options before your lease ends.
Yes, a few auto loans are built for specific situations, and the terms vary widely. Active-duty service members can find auto loan programs from military-focused lenders. The Military Lending Act's 36% military annual percentage rate cap generally applies to products such as payday and title loans, not standard vehicle purchase loans secured by the car, according to the Consumer Financial Protection Bureau.
Title loans, which let you borrow against a car you already own, sit at the risky end. They can carry APRs of 300% or more, and roughly 1 in 5 borrowers ends up having the car repossessed, per the Consumer Financial Protection Bureau. Buy-here-pay-here financing, where you borrow directly from the dealer, made up 9.24% of auto loans in early 2026 and typically costs more than bank or credit union financing, per Experian.
Yes, you can usually refinance an existing auto loan by replacing it with a new one at better terms. Refinancing is a practical move if your credit has improved since you first borrowed, or if your original rate ran high.
The recent savings have been meaningful. Borrowers who refinanced in early 2026 cut about 2.2 percentage points off their rate and saved roughly $81 a month, with the average refinance rate dropping to 8.05% from 10.29%, according to Experian. Be careful not to stretch the term so far that a lower payment costs you more overall, and see when it makes sense to refinance your car loan for the full walkthrough.
Cash-out auto refinancing replaces your loan with a larger one and hands you the difference in cash. It can help if you want better loan terms and extra funds for repairs, modifications, or another expense, all under one monthly payment.
The catch is that you're adding to the balance you have to repay, so even a low rate adds up over the term. Borrow only what you need, and confirm the new payment still fits your budget.
The right auto loan depends less on the label and more on your credit, your timeline, and where you borrow. Here's how the choices shake out by profile:
If you have strong credit: shop a secured, simple-interest loan and compare a bank or credit union offer against the dealer's.
If you're rebuilding credit: expect a higher rate, be cautious with title and buy-here-pay-here loans, and plan to refinance once your score improves.
If you already have a loan: check whether refinancing lowers your rate, especially if your credit has climbed.
One trend to weigh: more than a third of new-car loans (35.55%) now stretch beyond six years, with the average new-car term around 69.48 months, per Experian. A longer term lowers the monthly payment but raises the total interest you pay.
Turn what you just read into a short action plan:
Check your credit score so you know which rate tier you're likely to land in.
Line up more than one offer and compare auto loan offers side by side before you commit.
Run the numbers with an auto loan calculator to see how rate and term change your payment.
If you already have a loan, compare auto refinance options to see whether a lower rate is within reach.
There's no strict minimum, and higher scores earn lower rates. The lowest average rates go to super-prime borrowers with scores of 781 and up, while prime borrowers (661–780) still qualify for competitive rates, based on Experian's rate data by credit tier. Lower scores can still qualify, usually at higher rates.
In early 2026, new-car loans averaged about 6.39% and used-car loans about 11.43%, per Experian. Anything at or below your credit tier's average is a solid target.
Compare both, because dealer-arranged financing can include a rate markup, according to the Consumer Financial Protection Bureau. A bank or credit union preapproval gives you a number to negotiate against.
You can refinance most standard purchase loans, and borrowers who did so in early 2026 saved about 2.2 points on their rate, per Experian. Refinancing makes the most sense once your credit improves.
A secured loan uses your car as collateral and generally carries a lower rate, while an unsecured loan has no collateral and usually costs more. Most auto loans are secured by the vehicle.
This article draws on secondary sources, not a proprietary BestMoney survey, because no first-party BestMoney survey data exists for auto loans. The rate figures come from Experian's State of the Automotive Finance Market (Q1 2026) and Experian's average car loan rates by credit score. Market context comes from the Federal Reserve's G.19 consumer credit release, and the guidance on dealer financing, title loans, and military lending protections comes from the Consumer Financial Protection Bureau.
Experian, State of the Automotive Finance Market, Q1 2026 (lender mix, refinance savings, loan terms)
Experian, average car loan interest rates by credit score, Q1 2026 (new vs. used rates by tier)
Federal Reserve, G.19 Consumer Credit release (benchmark rate context)
Consumer Financial Protection Bureau (dealer vs. bank financing, title loans, Military Lending Act)
The BestMoney editorial team is composed of writers and experts covering a full range of financial services. Our mission is to simplify the process of selecting the right provider for every need, leveraging our extensive industry knowledge to deliver clear, reliable advice.
