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People who are in a tight spot financially and looking to borrow a relatively small amount of money for an affordable vehicle might seek out a small car loan. Even with a small auto loan, the basics of car loans still apply. Additionally, lenders typically have stipulations for the minimum car loan amount you can borrow, as well as for the car you can purchase.

There are both pros and cons to small car loans, and different factors will affect the exact size of the loan you can take out. If your goal is simply to have lower monthly payments for an auto loan, you have various options available aside from small car loans.

What Is the Smallest Car Loan You Can Get?

Although specifics vary among lenders, your minimum car loan amount generally must be at least $3,000. Note that the selling price of the vehicle can be less than this, but the total amount financed must usually be $3,000 or higher. This is true even for subprime loans, a type of car loan designed for those with poor credit (meaning a score under 580).

The reason lenders have minimum auto loan amounts is to encourage borrowers to buy themselves a car with a certain reliability, so that maintenance costs aren’t excessively high and the vehicle is dependable enough to not break down over the course of the loan.

Recommended: 9 Tips for Buying a Used Car

What Factors Affect How Big of an Auto Loan You Can Get?

There are a number of factors that affect how large of an auto loan you can get. This can include:

•   Credit score

•   Debt-to-income ratio

•   Employment status

Auto lenders will require certain documentation to prove the information provided and to determine whether or not they will approve the loan. Documents necessary may include proof of identity, income, residence, and insurance, as well as vehicle documentation.

Recommended: Smarter Ways to Get a Car Loan

Pros of Small Car Loans

With the cost of living continually on the rise, buying a more affordable car can make sense for your financial situation. If you’re able to find a lower cost vehicle that’s dependable, using a small car loan to attain it can help you avoid the high debt payments that come with financing a more expensive vehicle.

Cons of Small Car Loans

Small car loans may seem convenient, but they come with several drawbacks. Lenders often charge higher interest rates on smaller loans, increasing the total repayment amount. Fewer lenders offer small car loans, limiting options for competitive rates. And finally, securing a small loan may require a strong credit profile or a significant down payment.

Recommended: Can I Have Multiple Car Loans?

Small Car Loan Requirements

As mentioned, most lenders have a minimum financing requirement around $3,000. In addition, most will require that you are purchasing a car that:

•   Is no more than 10 years old

•   Has less than 100,000 miles on it

•   Has a non-branded title (meaning the vehicle does not have a car title indicating it has previously suffered serious damage)

•   Is a passenger vehicle

Recommended: Second Chance Car Loans

Getting a Small Car Loan

When getting a small car loan, you’ll generally need to meet the following car loan requirements for small car loans:

•   Good credit score: Most lenders prefer a credit score of 600 or higher.

•   Proof of income: Demonstrating steady income ensures repayment ability.

•   Minimum loan amount: Many lenders set a minimum loan amount, usually around $3,000.

•   Vehicle value: The car’s value must meet the lender’s standards.

•   Down payment: A significant down payment may be required to secure the loan.

Recommended: Average Car Loan Interest Rate by Credit Score

Tips for Lowering Your Car Loan Payment

There are several ways you can lower your car loan payment aside from securing a small auto loan. This includes the following:

•  Save enough money for a large down payment so the total amount you’ll need to finance is lower.

•  Buy a used vehicle instead of a new one.

•  Research various lenders to ensure you’re getting the lowest interest rate possible.

•  Work to increase the value of your car you currently own before trading it in.

•  Opt for a basic model of your chosen car, leaving behind nice but ultimately unnecessary extras like heated seats or a leather interior.

•  Consider looking into how to refinance a car if you already have an auto loan but believe that market conditions or your improved financial situation could help you get a better interest rate on your loan. You also could opt to lengthen your loan’s term through refinancing to lower monthly payments.

Recommended: Pros and Cons of Car Refinancing

The Takeaway

Taking out a small car loan is an option available to borrowers who are looking to finance a low-cost vehicle that meets the requirements set by the lender. A lender’s requirements can dictate the minimum loan amount you must finance and the condition of the car you purchase. Meanwhile, a borrower’s financial situation, including their credit history and employment status, will influence how big of an auto loan they can take out.

That being said, taking out a small car loan isn’t the only way to secure lower monthly car loan payments. There are several choices a borrower can make to do so, including choosing a more basic model of a vehicle or saving up for a larger down payment. Refinancing an auto loan is another option available to lower the monthly payments.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What is considered a small car loan?

A small car loan typically refers to a loan amount of $10,000 or less. These loans are often used for purchasing inexpensive used cars or for buyers making significant down payments. Loan terms may vary, but smaller loan amounts usually result in lower monthly payments and shorter repayment periods.

How can you get a small car loan?

To get a small car loan, check your credit score, compare lenders offering small loan amounts, and apply for pre-approval. Look for credit unions, online lenders, or banks with flexible terms. A significant down payment and proof of income can improve approval chances and secure better loan terms.

What is the smallest car loan that you can get when refinancing your vehicle?

The smallest car loan amount available when refinancing depends on the lender, but it typically ranges from $3,000 to $5,000. Some lenders may require a minimum vehicle value or loan balance to qualify for refinancing. Check with individual lenders to find their specific minimum loan amount policies.

Photo credit: iStock/zamrznutitonovi

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOALR-Q325-078

If you’re looking to make some passive income and you have an extra car that you don’t use very much, consider renting it out.

While there can be some monetary benefits to renting out your vehicle to strangers, there are also some real risks. Here’s a closer look at how to rent out your car.

What Is Car Renting?

Everyone’s familiar with Airbnb as a way for private citizens to rent out their homes, apartments, or even rooms in their house. About a decade ago, that model migrated to car rentals through websites like Turo or Getaround.

Turo and Getaround allow users to list their vehicle and rent it out to anyone looking for a car for hire, whether they need one to run to the grocery store for the afternoon or need it for multiple days for a getaway up the coast.

Recommended: 9 Tips for Buying a Used Car

Why Might You Consider Renting Out Your Car?

There are a number of reasons you might want to consider renting out your car. First, if you have an extra car that you rarely use, renting it out can be a way to earn extra cash without limiting your mobility.

If you work from home, you may need your car less. Making monthly payments on a vehicle you use infrequently may feel like a drain on your budget. Renting the vehicle out might help offset those costs.

Finally, demand for rental cars is up. This increased demand might mean you have an easier time renting out your own vehicle.

Steps to Rent Out Your Car

Ready to give it a try? Here are the steps to rent out your car:

1. List Your Vehicle

To list your vehicle, visit the website of a car-sharing service or download its mobile app. You’ll be asked for the make and model of your car, as well as a description of the vehicle and how much you’d like to rent it for.

2. Find Drivers

Drivers find you through a car-sharing app. They are often able to sort vehicles through various filters, including make and model, price, delivery fee, and other features. Drivers typically go through an approval process in which age and driver’s license are verified.

3. Complete the Transaction

Drivers book your vehicle directly through the car-sharing app, which handles the monetary transaction.

4. The Pickup

Some hosts will offer vehicle delivery for pick-up and return at private locations or frequent travel hubs like airports or train stations. Otherwise, drivers will have to go to the specific pick-up location to retrieve their vehicle. At this point, there may be a handoff of keys, or drivers may be able to electronically unlock the vehicle through an app.

5. Returning the Car

Drivers will return the vehicle to the specified return location. If they need the car for longer, or they want to return the vehicle early, they may contact you to make a request.

Recommended: Can Someone Take Over My Car Loan?

Options for Renting Out Your Car

Now that you know the steps for how to rent your car, you will likely want to use a peer-to-peer car-sharing app. Here’s a closer look at some of your options.

•  Turo: Turo claims to be the world’s largest car-sharing marketplace, with locations in the United States, Canada, the UK, Australia, and France. Most rentals require that drivers and hosts meet in person to exchange keys, as few rentals are able to be unlocked using the app. Hosts determine the rental pick-up and drop-off locations or offer a delivery service.

•  Getaround: Getaround is available in the United States and Europe. Rentals can be unlocked using the app, so hosts and drivers do not need to meet in person. However, rental owners will need to install the hardware that allows this system and pay a subscription fee.

Risks Associated With Renting Out Your Car

Yes, there are downsides.

Whenever you allow someone else to drive your car, there is a possibility of an accident, damage, or theft. Each car-sharing app offers some sort of protection plan for its owners, often in tiers that vary by coverage and expense.

The most expensive tiers offer the greatest coverage, but also take the biggest bite out of your profit. For example, at Turo, owners who accept 60% of the rental fee receive $750,000 in third-party liability insurance, Turo pays 100% of eligible damage costs, there is no deductible, there’s reimbursements for exterior wear and tear, and reimbursement for lost hosting income during repair.

Carefully examine the protection plans on offer before you sign up for a car share service. You may find that when you weigh the possible risks and rewards, you are uncomfortable renting to strangers.

Recommended: Ways to Increase the Value of Your Car

Car Financing Options

Some people choose to make peer-to-peer car-sharing a small business, buying a car or even a small fleet of cars to rent out. Unless you are able to buy the vehicle in cash, you’ll need to finance it through a bank or other lender, such as the dealership where you purchase the car.

Lenders will take a look at your credit history, including your credit score, to help determine the terms and interest rates they’ll offer. The better your credit history, the more favorable the terms.

If you’re renting out your car to increase cash flow, there are other options you may consider as well, including refinancing your car loan. It may be time to refinance a car if you’ve built your credit score or if interest rates fall. When you refinance, you pay off your old loan with a new one that has lower interest or better terms, making your payment cheaper.

Before refinancing, it’s important to consider the advantages and disadvantages of auto loan refinancing. In the pros column, you may be able to achieve a lower monthly payment or more favorable terms, and you may free up cash to put toward other financial goals. However, depending on your loan, you may be hit with prepayment penalties, your credit score may make a temporary dip, and it may be tough to find a lender willing to refinance.

It’s also important to consider the costs of auto loan refinancing, including early termination fees, transaction fees, registration fees, or title transfer fees.

Recommended: Refinancing a Car Loan: What to Consider

The Takeaway

Renting out your car can be a good way to increase passive income, especially if you don’t need the vehicle yourself. For some people, it can even be the beginning of a small home business. Before figuring out how to rent your car out, be sure to research your options for car-sharing apps and ensure that you are protected.

If you’re looking for other ways to increase your income, consider whether refinancing your vehicle could reduce the amount you pay each month or over the life of the loan.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Can you rent your car out?

Yes, you can rent out your car through platforms like Turo or Getaround. Ensure your car is well-maintained, set competitive pricing, create an attractive listing, and manage rentals effectively to attract renters and maximize earnings.

How do you rent out your car?

Sign on to the car-sharing app of your choice, fill in information about your vehicle, and the app will pair you with drivers.

Where do you rent out your own car?

The rental process is online. Drivers will pick up and drop off the car at a predetermined location, or owners may offer a delivery service.

Photo credit: iStock/FangXiaNuo

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOALR-Q325-077

Your alternator helps provide power to your car’s battery and to other electrical systems within your vehicle. If it’s not functioning properly, it can cause issues with your car and can make driving your vehicle dangerous.

Minor repairs to your alternator can cost less than $50 to a couple of hundred dollars, but if you need to replace your alternator entirely, you’re looking at a price somewhere between $747 and $842, on average, according to Kelley Blue Book. Costs may be higher or lower depending on the parts you use, the mechanic you choose, and the type of vehicle you drive.

Here’s a closer look at what an alternator is, the factors that contribute to cost of repair and replacement, and options to cover those costs.

Alternator Replacement Cost Breakdown

The two biggest factors that go into the cost of repairing or replacing your alternator are the price of parts and labor.

On average, you can expect to pay a mechanic between $85 and $175 per hour. Mechanic rates will vary depending on where you live, and they tend to be higher in bigger cities.

It will likely take two hours to replace your alternator, which could cost you about $350 on the higher end. In some cases, it may be more complicated and need specialized knowledge, which could end up pushing the price of labor higher.

The rest of the cost mostly comprises the price of parts. On average, these will cost up to $500 or more. Here, the price will depend on your car’s individual needs. For example, the amperage (the amount of electricity the alternator has to generate), the mounting style, and the types of electrical connections all have to match the specs of your engine.

The make and model of your car will also contribute to cost. If you have a relatively common vehicle, parts will likely cost you less. However, if you have a high-performance luxury vehicle, you may end up paying thousands of dollars to replace your alternator.

Recommended: Luxury Cars by Maintenance Ranked

Getting an Estimate

Before shelling out for a repair or replacement, do your homework. Research the average price of repair, and consider using online resources such as Kelley Blue Book’s Repair Pricing tool or Consumer Report’s Car Repair Estimate to find out what a repair or replacement for the make and model of your car should cost in your area.

Next, contact local mechanics to get a quote. Compare quotes to the average cost you found to understand whether you’re being offered a fair price.

If you haven’t worked with a mechanic before, look up reviews of the shop to see if customers have ever had major issues with them. You can also research them on the Better Business Bureau to see if the shop has had any complaints lodged against them.

What Does an Alternator Do?

Your alternator generates most of the electricity in your vehicle. Here’s how it works:

Your engine spins the serpentine belt, also known as the drive belt, which is attached to the alternator with a pulley system. The pulley system, in turn, rotates the alternator’s rotor shaft and a set of magnets situated around a coil. As it turns, this system generates an alternating current (AC). This then passes through your vehicle’s rectifier and is converted into direct current (DC), which can be used to recharge your vehicle’s battery and run the electrical systems throughout your car.

Examples of some of the electrical systems the alternator provides include power windows, power locks, the sun roof, the sound system, and the various sensors that monitor the functioning of your engine and other moving parts.

Your battery stores excess electricity for times when you need power and your engine isn’t running, like when you start up your vehicle.

Recommended: Costs to Repair a Catalytic Converter

Why Do Alternators Fail?

Alternators fail for a variety of reasons, including simple wear and tear from using your vehicle. Other reasons include leaking fluids that have put extra pressure on your vehicle, the serpentine belt slipping, or improper use of your jumper cables, which can unfortunately lead to damage.

Signs of Alternator Problems

Look out for the following signs that your alternator isn’t functioning properly.

•  A dead battery. An alternator that’s not working will not charge your battery properly.

•  Battery light is on. You may have a dashboard light that reads “charge” or shows a symbol of a battery. This may not mean your battery is dead, but may signal that there’s an issue with the charging system.

•  Strange sounds. Grinding or whirring sounds may be a sign that something is broken or beginning to fail in your alternator.

•  Weak power. Your alternator provides power to a number of car systems, including your power windows, headlights, and windshield wipers. If any of these are operating weakly or slower than usual, it may be a sign that they’re not receiving enough power.

If you notice any of these issues, have a mechanic perform a proper inspection to diagnose whether you’re having alternator problems or you’re having another issue with your car.

Recommended: Car Make and Model Explained

How to Finance the Cost of Alternator Repairs & Replacements

Depending on what kind of car you drive, the cost of an alternator can soar into the four figures, so it’s worth strategizing about how you will cover repair and replacements costs.

Cash

Cash is the least expensive way to pay for an alternator replacement as it doesn’t involve any fees or interest payments. In fact, it is a good idea to maintain a cash savings account or an emergency fund equal to three to six months’ worth of expenses. You can dip into this fund when things like unexpected car repairs crop up.

Credit Card

If you don’t have cash on hand, you may consider using a credit card. However, if you carry a balance, you will owe interest on your purchases, which can be 20% or higher. If you carry a balance for more than one month, your interest will begin to compound. In other words, you’ll start to owe interest on your interest. As a result, using credit cards is best done when you know you’ll be able to pay them off at the end of the cycle.

Personal Loan

Personal loans for car repairs are a cheaper option to consider, with interest rates averaging 12.64% for those with good credit in mid-2025, according to the St. Louis Federal Reserve. Personal loans allow individuals to borrow a lump sum of cash, which can be used for most reasons, including car repair. The borrower then agrees to repay the loan in regular monthly installments with interest.

Auto Loan Refinance

Finally, you may consider refinancing your auto loan with a new loan with a lower interest rate. Use interest rate savings to help cover the cost of auto repair. A car loan refinancing calculator can help you determine how much you might save. Carefully weigh the cost of refinancing a car against the potential savings.

Recommended: Guide to Car Loan Interest Rates

The Takeaway

If you notice your alternator isn’t working properly, it’s best to have it assessed as soon as possible. Signs of a faulty alternator include the battery light coming on, hearing strange sounds from the engine, and weaker power when using power windows or your headlights.

To pay for an alternator repair or replacement, you can pay with cash or use financing. One option is a cash-out auto refinance which gives you cash back when you get your new auto loan. You can then use the money to pay for the car repair.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Can I drive my car with a faulty alternator?

You may be able to drive a short distance with a faulty alternator, but experts don’t recommend it for safety reasons and to help preserve the other parts connected to the alternator

Are there different types of alternators for different car models?

Yes, the type of alternator you need will be specific to the make and model of your car.

Can an alternator be repaired, or does it need to be replaced entirely?

In some cases, you can repair your alternator rather than replace it. However, if one component has already broken or worn out, it may be a sign that others are soon to follow. In some cases, it may be cheaper in the long run to simply replace the alternator.

How long does it take to repair or replace an alternator?

Replacing an alternator likely takes around two hours. A repair could take less time.

Can I replace the alternator myself to save money?

If you know your way around an engine, you could replace your alternator yourself and save a couple hundred dollars or more in labor costs.

Photo credit: iStock/PeopleImages

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOALR-Q325-076

Car title loans and auto loans sound deceptively similar, but they actually are entirely different types of loans. An auto title loan requires that you already own a car outright or have significant equity in it, and it then allows you to borrow money by using that car as collateral. With an auto loan, on the other hand, you’re securing funds to help you purchase a vehicle.

There are also critical differences between a title loan vs. auto loan when it comes to interest rates, typical loan terms, and consequences of non-payment. Here’s a closer look at how these two loans compare.

What Is a Title Loan?

When someone owns their vehicle outright or doesn’t owe much money on the vehicle, some lenders will let them borrow funds by using the car as collateral. This is known as a title loan. In general, people can borrow 25% to 50% of the vehicle’s value, with loan amounts ranging from $100 to $10,000.

This is a short-term type of financing with repayment often due within 15 to 30 days. If a borrower can’t meet this timeframe, the lender may allow them to take out a new loan with additional interest and fees. If you’re unable to repay the loan, the lender can seize your vehicle in order to recoup their losses.

A loan on car titles is allowed in some states but not all, due to their high interest rates.

Recommended: Guide to Precomputed Interest Car Loans

Title Loan Pros

It can be simple to apply and qualify for a loan on car titles. Lenders typically don’t check your credit, and even if they do, they’ll often approve those with poor credit. In fact, lenders will usually approve the loan if you have the title to your vehicle (or enough equity in it) and sufficient income to meet the lender’s requirements.

Additionally, title loans are an option to meet a need for fast cash. You can often walk out with cash on the same day you apply.

Title Loan Cons

Although title loans can be convenient to get, they come with much higher costs than a typical car loan. This is the case even if you pay back your loan on time — and studies suggest that most people who take out this type of loan need to take out a new one on the original loan’s due date.

Why? Because they can’t afford to pay for the first one. This cycle can continue to repeat itself as further fees and interest are added with each additional loan. And even worse, the borrower’s car could end up getting repossessed if they’re unable to pay.

Recommended: No Income Verification Car Loans

Title Loan Payment Plan

Individual lenders can decide how to structure their payment plans. But according to the Federal Trade Commission (FTC), this is what a typical title loan looks like:

The average monthly finance fee is 25%, which equals an annual percentage rate (APR) of about 300%. There may also be fees involved, including loan origination, processing, and document fees. Some lenders will also require that you buy roadside service plans or other add-ons.

The FTC provides this example of a title loan payment plan:

•  Loan amount: $1,000

•  Term: 30 days

•  Finance fee: 25%

When the loan is approved and papers signed, the borrower hands over the car title and receives $1,000. In 30 days, the amount due is $1,250, plus any fees the lender charges.

If that payback is not possible, the lender may allow a rollover loan. Here’s an example from the FTC of what that would look like:

•  The original $1,000 is rolled over for another 30 days.

•  Another $250 in finance fees, plus any other fees, is added to the balance.

•  30 days after the rollover, the borrower owes $1,500 ($1,000 borrowed, plus two sets of $250 finance charges), as well as any other fees.

The FTC notes that a borrower can have their vehicle repossessed even after making partial payments. The lender may even install a GPS system and a starter interrupt device to make it easier for them to disable the ignition remotely, locate the car, and repossess it. The lender can then resell the vehicle. In some states, the lender can keep all the money from the sale, even if they sell the vehicle for more than what the borrower owes.

What Is an Auto Loan?

When you’d like to buy a vehicle, either new or used, you can seek financing from the dealer or from a bank, credit union, or online lender to help pay for the vehicle. You’ll then pay back the amount borrowed in a series of installments. The amount of these installment payments is based on the original loan amount as well as the interest rate and loan term.

Each payment will contain both principal (a key piece of terminology for car loans to know) and interest. The principal portion of the payment will lower the amount owed, while the interest will go to the lender. In other words, interest is effectively how the borrower “pays” the lender for lending them the money upfront.

Recommended: Paying Off a Loan Early

Auto Loan Pros

If you’re in need of a vehicle and can’t purchase it with cash, then an auto loan is the typical next step. Interest rates are relatively low — much lower than the rate for car title loans — and as long as you can comfortably include the car payment in your budget, a car loan is a reasonable way to pay for the transportation you need.

Car loans allow you to cover the cost of a vehicle over a longer period of time, with the average loan term in mid-2025 being 69.8 months for a new car, according to Edmunds. Plus, taking out a car loan and making payments on time can help you to build your credit.

Auto Loan Cons

You will pay interest on the money borrowed through an auto loan, and the longer the term of the auto loan, the more interest you’ll pay over the life of the loan. Credit scores will matter when applying, and those with lower scores may pay higher interest rates. Plus, if you can’t make payments on time, this can damage your credit score.

Another downside of auto loans is that the vehicle is usually used as collateral on the loan, which means that the lender could repossess the vehicle if you default on the loan. Defaulting on an auto loan will also further damage your credit score. That being said, there are different types of auto loans, and some lenders may offer unsecured auto loans where the vehicle is not used as collateral.

As another consideration, cars generally depreciate in value. If a down payment isn’t made or it’s small, you may end up owing more on the vehicle than what it’s worth. This can be a challenge if you try to refinance your auto loan down the road.

Recommended: What Is the Average Credit Score to Buy a Car?

Auto Loan Payment Plan

With an auto loan, payments are based on a few factors, including:

•  The loan amount: This is the cost of the vehicle and any fees, minus the down payment made and any fees paid upfront.

•  The loan term: This is the length of the auto loan.

•  The loan’s interest rate: This is the cost of borrowing funds.

By using a loan calculator online or talking to a lender, this information will allow you to determine the total principal and interest payment you’d make each month on an auto loan.

As mentioned, some of each payment will go toward the principal and toward the interest. Payments toward the principal reduce the auto loan’s remaining balance, while interest payments will go to the lender. As the balance goes down, less money goes to interest.

As an example, say you purchase a vehicle that costs $30,000. You put down $3,000 as a down payment, and then take out an auto loan to cover the remaining $27,000. Your interest rate on this loan is 5%, with a term of 60 months and monthly payments of $509.52. If all payments are made on time with no early payments, the interest over the life of the loan would total $3,571, for a total payback amount of $30,571.

Using August 2025 as a start date, here’s how the balance and monthly interest amounts would go down after each year:

•  August 2025:

•  Interest payment: $113

•  Principal payment: $397

•  Balance: $26,603

•  August 2026:

•  Interest payment: $92

•  Principal payment: $417

•  Balance: $21,708

•  August 2027:

•  Interest payment: $71

•  Principal payment: $439

•  Balance: $16,562

•  August 2028:

•  Interest payment: $48

•  Principal payment: $461

•  Balance: $11,153

•  August 2029:

•  Interest payment: $25

•  Principal payment: $485

•  Balance: $5,467

•  July 2030:

•  Interest payment: $2

•  Principal payment: $507

•  Balance: $0 (loan is paid in full)

Title Loans vs. Auto Loans

Here’s a side-by-side look at how a title loan vs. auto loan compare:

The Takeaway

Title loans and auto loans are used for different purposes. Title loans more closely resemble a payday loan, with a lender providing quick cash in exchange for the vehicle’s title and high interest rates. Auto loans typically have a lower interest rate compared to loans on a car title. With auto loans, a borrower will typically make payments over a longer term (usually years) on a loan taken out to help purchase a vehicle or refinance an existing auto loan.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What is the difference between title loans vs auto loans?

Title loans are short-term, high-interest loans using a vehicle title as collateral, often aimed at borrowers with urgent financial needs. Auto loans are long-term loans designed for purchasing vehicles, typically offering lower interest rates and monthly payments. Title loans risk repossession faster, while auto loans prioritize financing ownership over time.

What are the pros of a title loan and auto loan?

A title loan is a way to get quick cash without needing a good credit score (although at a high interest rate and with a short term). An auto loan, on the other hand, allows a borrower to purchase a car without having to pay for it entirely out of pocket.

What are the similarities between title loans vs auto loans?

Both title loans and auto loans are ways to get cash. With a title loan, the borrower could use the vehicle as collateral to get funds for a variety of purposes. With an auto loan, the borrower is getting financing specifically to buy a vehicle.

Photo credit: iStock/mohd izzuan

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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There are some potential pros and cons to paying off your car loan early. Paying off a car loan early, in some cases, may minimize your interest costs. The average amount financed for new car loans at was $39,800 in 2025, according to the United States Federal Reserve. Depending on your personal circumstances, it might be right for you to pay that loan off early.

There are other cases, however, where it might not be right for you to pay off a car loan early. Paying off your car loan early may lead to penalties if your auto loan contract includes a prepayment penalty clause. A prepayment penalty is a fee that lenders may demand when you make early or extra payments on a loan.

Not all lenders penalize you for prepaying, but some will. Below we highlight how prepayment penalties work and explain the potential benefits and disadvantages of paying off your car loan early.

Pros and Cons of Prepayment at a Glance

Here’s a quick summary of some of the pros and cons of paying off your car loan early:

Recommended: 9 Tips for Buying a Used Car

When to Consider Paying Off an Auto Loan Early

If you have the cash available, you may want to consider paying off your auto loan early if:

•  You don’t have any high interest debts to tackle first.

•  You already have an emergency fund saved.

•  You know you’ll be seeking additional credit in the near future, such as applying for a mortgage, so you want to improve your DTI.

•  The money you save on interest is more than the penalty (if there is one).

Potential Benefits of Paying Off a Car Loan Early

If you find that you have room in your budget to pay off your car loan faster, there can be a number of possible benefits.

Saving on Interest

Auto loan payments are amortized over the term of your loan. Amortization refers to your schedule of loan payments and what exactly each part of each payment pays for. A portion of your payment is used to pay off your loan interest and fees, and the rest goes to paying off your principal. If you add money to your monthly payment, that money will go directly to paying off your principal.

If your interest payments are calculated using a simple interest formula — meaning they’re calculated based on the balance of your loan — you will reduce your interest payments. If your interest payments are precomputed, they won’t change. Lenders may determine your finance charges by calculating APR on a car loan as specified in your auto financing contract.

Recommended: Auto Loan Refinance Calculator

Improving Your Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is a measure of how much money you owe compared to how much money you have coming in. Lenders use it to help them determine how much risk they’d be taking on if they offered you a loan. If you’re seeking new credit, paying off your car loan early can lower your DTI, which demonstrates that you likely have enough income to pay back a new loan.

Freeing Up Cash

Paying your loan off early can free up that cash to be used for other financial goals, from saving for an emergency fund to socking away cash for retirement. The average monthly payment on a new car loan stood at $745 in the first quarter of 2025, according to Experian. Those expenses can add up over the course of a year.

Avoiding Going Upside Down

Cars depreciate over time, and often faster than your loan term. That can mean that at some point you may end up owing more on your auto loan than the car is actually worth. That’s especially likely if your term is long or if you have a particularly high interest rate. Prepayment can help you avoid an upside down loan.

Recommended: Guide to Writing Off a Car for Business

Potential Disadvantages to Paying Off a Car Loan Early

While there are potential advantages to paying off your loan, there are also some disadvantages — in addition to prepayment penalties — that may make you think twice.

Your Credit Score May Take a Hit

It’s strange to consider, but paying off your debt early may actually hurt your credit score. Your credit mix and payment history make up a portion of your score. When you pay off your loan early, your track record of on-time payments gets cut short.

Also, a mix of different kinds of credit is a plus, and paying off your auto loan will remove one type of loan from that mix.

On the bright side, the dip in your credit score is usually temporary as long as you continue to manage your other debts responsibly. Lenders typically report loan account information to the credit bureaus every month.

Recommended: Does Paying Off a Car Loan Help Your Credit?

Opportunity Costs

If you’re using extra cash to pay off your car loan early, that means you’re not using it for other potentially more beneficial purposes. For example, if you have high interest credit card debt, you may save more money tackling that first than you would paying off your car early.

Prepayment Penalties

Lenders may work prepayment penalties into your contract in a couple of different ways. These include:

Percentage Penalties

You may be charged a certain percentage of your remaining balance if you pay your loan off early. The longer you’ve had the loan, the lower the penalty will be. This type of penalty is not legal in every state or for every loan, and it must be disclosed in the loan documents.

Rule of 78

Lenders may also try to disguise prepayment penalties. For example, in some states, lenders may use the Rule of 78, in which your payments go toward paying off the full interest amount calculated on the loan before they are applied to the principal. This ensures interest payments are made in full, even if you pay the loan off ahead of schedule.

Precomputed Loans

Precomputed loans calculate the full price of a vehicle and interest rates on the loan, and the borrower agrees to pay off both. This is another way lenders ensure they receive as much interest payments as possible if you decide to pay the loan off early. When comparing different types of car loans, precomputed interest auto loans may not be as consumer-friendly as simple interest car loans.

While precomputed interest car loans and the Rule of 78s are technically not penalties, borrowers typically don’t see great savings when paying these loans off early. Watch out for these contingencies in loan contracts as you shop for an auto loan, and don’t be afraid to negotiate to have them removed or look for a lender that doesn’t impose them.

Recommended: Can You Roll Over a Car Loan?

Options for Paying Off a Car Loan Early

You have a handful of options when it comes to paying off your auto loan. If you’ve recently had a financial windfall, such as a bonus at work or an inheritance, you may pay your loan off in full in one lump sum.

Here are other prepayment options you may consider:

•  With a bonus or inheritance, you may be able to make smaller lump sum payments to pay off chunks of your loan at a time. You won’t eliminate interest payments in this case, but you will potentially make them smaller.

•  You may increase the amount you pay each month to pay down principal, again potentially lowering the amount of interest you pay.

•  Finally, if you’re seeking to lower your interest rate or make your monthly payments more manageable, you may consider refinancing your car loan. When you refinance, you take out a new loan, which may offer better terms and rates, to pay off your old one.

Recommended: What Are Car Loan Charge-Offs?

The Takeaway

While it’s almost always a good idea to reduce your debt load, it’s important to look at your loan documents to check for prepayment penalties before paying off your car loan early. If your lender does charge prepayment penalties, it may be worth considering other options rather than paying off the loan. These options may include paying off smaller chunks at a time, putting extra towards the principal each month, or refinancing your auto loan with a new lender.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What are the advantages of paying off a car loan early?

Advantages of paying off a car loan early include saving money on interest, freeing up cash each month, and improving your debt-to-income ratio.

Are there any drawbacks to paying a car loan off early?

The main drawback to paying off a car loan early is having to pay prepayment penalties, if your original loan has one. Make sure to check the loan carefully before deciding to pay off your car in full.

How can I calculate the savings of paying my car loan off early?

You can use an auto loan payoff calculator to see how much you’ll save by paying your loan off early. Likewise, if you decide to refinance, you can use an auto loan refinancing calculator to view your savings.

Photo credit: iStock/necati bahadir bermek

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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