Auto Loans

An auto loan is a loan used to finance the purchase of an automobile and usually backed by a lien on the vehicle. Auto loans may usually be obtained from your bank or credit union or from the auto dealer selling the vehicle. Your credit union will usually offer the lowest interest rate.

The interest paid on an auto loan is no longer deductible on your federal income tax return. For this reason, many now get home equity loans instead to finance the purchase of autos. This results in paying the lower interest rate of a second mortgage and makes the interest payments tax deductible.

In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.