How auto loans work: dealer vs bank financing, terms and add-ons (2026)

How does an auto loan work?

A lender pays for the car, holds it as security, and you repay the amount plus interest in monthly payments over the term you agree to.

The CFPB says lenders set the rate and terms from your credit score and history, your income, the loan amount, your down payment and the term. It also says they generally don't have to offer you their best rate ^[3]. The CFPB adds that lenders must give you written Truth in Lending disclosures before you sign ^[1].

Should you finance through the dealer or a bank?

Get a quote from a bank or credit union first, then let the dealer try to beat it. The CFPB says dealer rates are generally higher because of the markup.

Dealer financing is called indirect because the dealer sits between you and the lender. The dealer's finance and insurance office sends your application to lenders. The CFPB says most dealers contact about five and then show you one offer ^[1]. The rate the lender quotes the dealer is the "buy rate." The rate the dealer offers you is the "contract rate," and it may be higher to pay the dealer ^[2]. The FTC says the same: the APR you negotiate with a dealer "usually includes an amount that compensates the dealer for handling the financing," and the dealer usually sells the contract to a bank, finance company or credit union ^[5].

Going direct means applying with a bank or credit union yourself. The CFPB says this tends to be cheaper because you avoid the dealer markup, and you get a quote with a rate, term and maximum amount that you can take to the dealer ^[1]. You can ask the dealer whether it got other offers with lower rates ^[1]. The CFPB also says that several lenders checking your credit within 14 to 45 days generally count as a single inquiry ^[3].

What are average auto loan rates right now?

The Fed's latest averages: 7.54% on 60-month and 7.17% on 72-month new-car loans at commercial banks (August 2026), and 6.3% at finance companies (June 2026).

For comparison, the Fed's 2025 annual averages were 7.65% on 60-month bank loans and 6.4% at finance companies ^[6]. The finance company figures cover most captive and non-captive finance companies ^[6].

How long should an auto loan be?

As short as you can afford. The FTC says the longer the loan, the more expensive the deal will be overall.

The average new-car loan at finance companies runs 67 months ^[6]. The FTC warns that "the longer the length of the loan, the more expensive the deal will be overall" ^[5]. The table below shows how much. Going from 60 to 84 months cuts the payment by about $164 and adds about $3,033 in interest.

How much should you put down on a car?

Whatever you can without draining savings. The FTC says a down payment cuts the amount you finance, and with it the total cost of the loan.

The FTC says a down payment reduces the amount you need to finance, which lowers your total cost ^[5]. The CFPB lists the down payment among the things lenders weigh when they set your rate ^[3]. On a $40,000 car at 7.54% for 60 months, $8,000 down cuts the payment from $802.28 to $641.82 and saves $1,627 in interest. Our arithmetic.

What happens if you owe more than your trade-in is worth?

That's negative equity. The dealer can roll what you still owe into the new loan, so you borrow more, and you end up paying for the old car too.

"If you owe more than the car is worth, that's called negative equity," says the FTC, and it may increase the amount you borrow on the next car ^[5]. Roll $4,000 into a $35,000 loan at 7.54% for 72 months and the payment rises from $605.83 to $675.07. You'd pay $4,985 more in total, $985 of it interest on the old debt. Our arithmetic.

Do you have to buy GAP insurance or a service contract?

No, unless the lender truly requires it, and then its cost has to be in the APR. The FTC says add-ons aren't free and it's fine to say no.

The FTC names the common add-ons: GAP policies, window etching, extended warranties and service contracts. It also says "It's ok to say no to add-ons, and to ask the price" ^[5]. GAP is meant to cover the difference between what you owe and what your insurer pays if the car is stolen or totaled. The CFPB calls it optional, says its price "can vary greatly," and notes your own auto insurer or a direct lender may sell it ^[4].

If you're told you must buy GAP to get the loan, the CFPB says to ask where the contract says so. If it really is required, its cost must be in the finance charge and the disclosed APR. You can cancel optional add-ons, and you may get a refund if you sell, refinance or pay off the loan early ^[4]. Financing an add-on costs more than its sticker. A $1,500 product rolled into a 60-month loan at 7.54% costs $1,805 by the end.

What happened to the FTC's CARS Rule?

It never took effect. The Fifth Circuit vacated it on January 27, 2025, and the FTC formally withdrew it in a final rule effective February 12, 2026.

The FTC published the Combating Auto Retail Scams (CARS) Rule in January 2024. Dealer groups challenged it in the Fifth Circuit, and the FTC delayed its effective date while the case went on. On January 27, 2025, the court found that the FTC "violated its own regulations when it failed to issue an ANPRM," an advance notice of proposed rulemaking. It held the error wasn't harmless and vacated the rule. The FTC's February 2026 final rule withdraws the CARS Rule to match that decision, effective February 12, 2026 ^[7].

So there's no federal CARS Rule for dealers to follow today. The lender still owes you Truth in Lending disclosures before you sign ^[1].