Americans Don’t Understand Auto Loans, Millennials Understand Less

Study shows many Americans, especially Millennials, don’t understand auto financing fundamentals

Americans Don’t Understand Auto Loans, Millennials Understand Less

Buying and financing a car can be a confusing and difficult process, and it’s almost impossible to make financially smart decisions when you don’t understand all the factors involved.

In order to find out what people know and don’t know about auto financing, we surveyed 800 Americans who have applied for auto loans about their auto financing knowledge and found:

Many Americans are qualifying for auto financing, but aren’t sure how.

  • Nearly 4 in 5 (79%) were approved for the last auto loan they applied for
  • More than half (51.9%) can’t name the 3 major credit bureaus
  • An overwhelming majority of respondents (94%) weren’t aware that auto lenders often use a specialty credit score, called an Auto FICO, when evaluating auto loan borrowers
  • Nearly 3 in 5 (60.9%) think lenders consider age and marital status when evaluating loan applicants

Most Americans don't know how to properly evaluate an auto loan offer.

  • Nearly 3 in 5 (59.9%) don't understand the relationship between loan term and interest.

What Americans Think is the Most Important Factor When Evaluating a Loan

  • All factors considered holistically - 47.9%
  • Interest rate - 21.9%
  • Monthly payment - 14.3%
  • Loan amount (price of car) - 7.9%
  • I don’t know - 2.4%

Most Americans are unaware of a common, yet deceiving auto dealing practice.

  • 2 in 3 respondents didn’t know dealers can add interest to your loan to make more profit. in fact, more than 2 in 5 (41.3%) believed this practice was illegal

Other concepts people don’t understand? Being “upside down” and gap insurance.

  • More than 2 in 5 (42.6%) don’t know what it means to be “upside down” or “underwater” on your loan
  • More than 3 in 5 (62.1%) don’t know what gap insurance is

Millennials Vs. Generation X

There are clearly some auto loan concepts the general population doesn't understand, but we learned millennials understand even less, especially when compared to Generation X.

Knows the three major credit bureaus

  • 64% - Gen Xers
  • 38% - Millennials

Understands the factors you’re evaluated on by a lender

  • 46% - Gen Xers
  • 30% - Millennials

Understands how to evaluate the quality of an auto loan offer

  • 54% - Gen Xers
  • 43% - Millennials

Knows what it means to be “upside down” or “underwater” on a car loan

  • 64% - Gen Xers
  • 53% - Millennials

Knows what gap insurance is

  • 42% - Gen Xers
  • 35% - Millennials

The Auto Financing Basics

Are you one of the American’s who doesn't understand these auto financing concepts? Not to worry, we’ll give you the rundown of everything you need to know.

The three major credit bureaus in the United States are Experian, Equifax and TransUnion. While there are many credit reporting bureaus available to consumers, these are by far the biggest players.

See a side-by-side comparison of the three credit bureaus

When you apply for an auto loan, lenders consider several factors when making a decision, none of which are your age or marital status (that would be illegal). Some of the things they look at are: Your FICO (which may include your Auto FICO), your loan to value ratio (loan amount to value of the car), debt to income ratio (how much debt compared to how much money you make) and how likely you are to pay off your auto loan.

The longer the loan term the more interest you pay. Many people opt for a longer loan term in favor of smaller monthly payments. What people don’t understand is a longer term means more interest. Our recommendation is if you can manage the monthly payments, get as short a term as possible. The faster you pay off the loan, the less interest you pay and the sooner you’ll be relieved of debt. You can estimate monthly payments using a free auto loan calculator

Yes, dealers can add interest to your loan. You can obtain an auto loan from a lender yourself, like a bank or credit union, or you can have the dealer set up the loan for you. The downside to the dealer setting up the loan is that it gives them more control and less transparency. Dealers often add a percentage or two of interest to loan offers in an attempt to make more from the deal.

Read more about direct vs. dealer financing

When you are offered a loan, it’s important to evaluate the offer holistically before accepting. While many people evaluate the loan on the monthly payment or interest rate alone, it is important to take all the factors into consideration equally. The most affordable monthly payment can come at the cost of paying high interest over the course of a long term length.

Being “upside down” or “underwater” on your car loan means you owe more money than the car is worth. If you have a high interest loan or put down a small down payment there will most likely be a period of your loan in which you owe more than the car is worth. This isn’t necessarily a bad thing. Unless…something happens to the car. In the event of a total loss, meaning the car is totaled in an accident or stolen, you’re still on the hook for the remainder of your balance. That’s where gap insurance comes in handy. Gap insurance covers the difference between the value of the car (what your traditional insurance covers) and the remaining balance of your loan.

At Instamotor, we are committed to educating our users on all things related to buying a used car, including how to finance them. It’s important to us that our users are properly educated on the auto financing process so they can feel confident, not just with the car they decide to buy, but with how they decide to buy it. Ready to buy a car? Start with figuring out how much you can afford by using our Car Affordability Calculator.


We surveyed 800 Americans who have applied for at least one auto loan via the survey platform Pollfish about their knowledge of auto financing concepts and processes. The survey was presented in the form of a multiple choice quiz and wrong answers were used to indicate concepts, terms and processes not understood. The survey was conducted on November 14, 2017.

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Brionna LewisBrionna Lewis

Brionna is on a roller coaster that only goes up. You can follow her on twitter @BrionnaLewis.