General August 2, 2020 10

What Are Auto Loans?


Auto Loans Meme

Hello Friends, I hope all is well with you! I am back to cover another type of debt – auto loans. This is a type of loan that you get when you don’t have the full purchase price of the vehicle that you want or need to buy. This is another type of loan that you will likely encounter at some point in your life, so I am going to try and provide you with as much information as I can. Grab your thinking caps and let’s get moving!


What are Auto Loans?

Mr. Nahas, what are auto loans? I like the question! Auto loans are a specific type of debt that is used to purchase a vehicle. This debt is considered secured, which means the vehicle will be the collateral in the event you default on your payments. These loans are also amortized, which means payments are spread over multiple periods (term). These are short-term loans, usually between four and seven years, but you do have the option to make it shorter. The important things to know are:

  1. Purchase Price of Vehicle – The amount that you will buy the vehicle for
  2. Loan Amount – The initial amount that is borrowed
  3. Trade Allowance – The amount the dealer will give you for the vehicle you are trading in (if applicable)
  4. Amount Owed on Trade – The loan balance that is still owed on the vehicle you are trading in (if applicable)
  5. Down Payment – This is how much cash you will put down towards the purchase price of the vehicle
  6. Term – This is the time period that the creditor wants the debt to be paid back. The most common term is 60 months (5 years), but there are options for shorter terms
  7. Interest Rate – The Federal Reserve sets interest rates and then your lender determines the interest rate they give you based on your credit score. The interest is simple, mean there is no compounding effect.
  8. Taxes – This is any state or local taxes that you must pay
  9. Fees – This includes any dealer fees, document fees, title fees, etc. Some are taxed and some aren’t
  10. Rebates – Any rebates that the dealer or the car manufacturer gives you. These may or may not be taxed depending on your state
  11. Amortization Schedule – this is a table detailing how each payment is split between principal and interest over the life of the loan


How to Apply for an Auto Loan

Mr. Nahas, how do I apply for an auto loan? Good question! Auto loans are usually a lot simpler but still require some documents. You will need:

  1. Proof of Identity – this should be any government-issued identification. The name should match the application
  2. Proof of Income – this is usually recent pay stubs, tax records, or any other document that proves you make the money you said you make on your application
  3. Proof of Residence – this is usually any sort of recent utilities bill that matches the address on your application
  4. Proof of Insurance – this is the document that you receive from your auto insurance company that states you have auto insurance. It’s important to note that the insurance does not have to be for the car you are buying at the time of close. You will have a few days to switch your insurance to the new car
  5. Financial History – this will include your employment history to make sure that you have had steady jobs
  6. Credit History – they will look at your credit score and look at your credit report to make sure that there are no red flags
  7. Vehicle Information – this is the make, model, and year of the car as well as some other important information that relates to the car
  8. Vehicle Registration (if you are trading in) – this is the official document that states you own the car that you are trading in

After you are able get these documents or know where to get them, applying is relatively simple. You are able to apply for an auto loan a few different ways

  • Visit your bank or credit union in-person or go to their website and apply for an auto loan
  • Work with the dealer to get you financing; dealerships usually have a lot of connections and are able to get you financing either through a bank or through the dealer itself. The dealer may have higher interest rates than your bank or credit union
  • Visit a loan search engine like Lending Tree and enter your details


Auto Loan Example

I think that providing an example would be worthwhile.

  1. Purchase Price of Vehicle – $25,000
  2. Interest Rate – 4%
  3. Term – 60 months (5 years)
  4. Trade Allowance – $5,000
  5. Amount Owed on Trade – $3,000
  6. Down Payment – $4,000
  7. Taxes – 6%
  8. Fees – $1,000 (untaxed)
  9. Rebates – $0
  10. Loan Amount – $21,500


Auto Loan example 1

The picture below is how you get the total loan amount


Auto Loan example 2

I hope that I provided you enough information about auto loans! These types of loans take less time and effort than home loans, but it’s still important to know about them and the process. If you have any questions or need me to clarify anything, post a comment and I will reach out to you as soon as I can. Thank you, friends, for stopping by! Take care and see you soon!

Peace Out,

Mr. Nahas

P.S. Don’t forget to like, comment, subscribe to my email list, and to share this so I am able to help as many people as possible!

About the author

Mr. NahasFinance:


  1. QueridaJ

    August 3, 2020

    I can't begin to emphasize how crucial financial literacy is, I truly wish it was a subject taught in school to all students. Thank you for dispelling myths, educating and breaking down imposing concepts.

    • Mr. NahasFinance

      August 12, 2020

      As do I! Financial literacy is something that everyone needs to learn and I think it would go a long way if people are able to learn

  2. ceridwensilverhart

    August 6, 2020

    I should print this out for reference. Thanks for covering this type of loan!


    August 12, 2020

    Your posts virtually educate me!

    • Mr. NahasFinance

      August 12, 2020

      I am so happy that you are learning! that is my main goal from this!


        August 12, 2020

        Oh yes!!!!

      • Ankit Pareek

        August 17, 2020

        Very insightful post!! I hope you will find the below post useful.


        August 18, 2020

        Lemme check it out!

  4. usfman

    August 29, 2020

    How might these terms differ if you leased a car?

    • Mr. NahasFinance

      August 30, 2020

      Hello, I hope all is well! Think of leasing as borrowing the car from the dealer for a few years. You pay a monthly cost, and they let you drive the car, but the catch is that you are limited on the number of miles you can drive per year. Each lease is different, so it can be 15,000 miles/year or less or it could even be more, it just depends on the terms. A maintenance is usually handled by the dealer (gas and tires are not unless you get a plan for that). Repairs that are caused by you are your responsibility. I hope this helps! Let me know if you have any other questions

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