A: Monthly payments for some auto loans may not be calculated the same way a mortgage loan is.
For mortgages, the process of amortization is essentially a compounding method. A good way to think about mortgage amortization is that you dont have one single loan, but rather individual loans with terms of 360 months, then one for 359 months, then one for 358 months and so on, all strung together.
Each month sees a payment calculated with a smaller loan balance over the new shorter term, and while the total of the payment remains the same, the amount of interest you pay in a given month decreases while the amount of principal you pay increases.
This is a process known as “amortization.” To determine your monthly mortgage payment over the life of your loan, be sure to check out our mortgage calculator.
Simple interest add-on loans: These are actually written as a single loan; all of the interest that will be due is calculated up front, added to the total of the loan as a finance charge, then that sum is divided over the number of months in the term to arrive at your monthly payment. Each payment consists of exactly the same amount of principal and interest, and as such, theres no savings to be had from prepaying these kinds of loans early.
Simple interest amortizing loans: These work like a mortgage, with a declining loan balance and declining term producing a constant monthly payment with changing compositions of principal and interest. Prepaying these can save you some money.
Many people need to finance large purchases like a home or car at some point This leads to the common question – is a car loan a mortgage? While they share some traits, there are important distinctions between auto loans and mortgages that borrowers should understand
In this comprehensive guide we will cover
- The definition of a mortgage
- What is an auto loan?
- Main differences between car loans and mortgages
- Credit score requirements
- Loan approval process
- Interest rates and fees
- Loan amount and term length
- Collateral and liability
- Payoff methods and penalties
Let’s dive in and see how mortgages and auto loans compare.
What is a Mortgage?
A mortgage is a loan used to finance the purchase of real estate, usually a house or condominium. The home serves as collateral for the loan. If the payments are not made, the lender can foreclose and take possession of the property.
Mortgages are secured loans that require a down payment of typically 10-20% of the purchase price They have long repayment terms of 15-30 years with fixed or adjustable interest rates The loan amount for a mortgage is usually tens or hundreds of thousands of dollars,
Mortgages are formal legal agreements with notarized paperwork and title transfers. They require extensive credit checks, income verification, and property appraisals from the lender.
What is an Auto Loan?
An auto loan is financing used to purchase a car or other vehicle like a truck or SUV. The vehicle serves as collateral that the lender can repossess if the borrower stops making payments.
Auto loans are usually for smaller loan amounts of $10,000 to $40,000. Little or no down payment is required. Auto loans have shorter 1-6 year repayment terms and higher interest rates than mortgages.
The auto loan process is faster with less paperwork than a mortgage. Lenders mainly check credit scores and income to approve buyers. Auto loans can be obtained directly from dealerships or banks and credit unions.
Key Differences Between Car Loans and Mortgages
While car loans and mortgages have some basic similarities, there are important distinctions between them:
Loan Amount
Mortgages are for much larger loan amounts, usually over $100,000 versus $10,000 to $40,000 for auto loans.
Interest Rates
Mortgage rates are lower, often between 3-6% compared to 6-20% interest rates on auto loans.
Term Length
Mortgages have 15-30 year loan terms. Auto loans are shorter at 1-6 years.
Credit Checks
Mortgages require in-depth credit checks on all three credit reports. Auto loans may only check one report.
Collateral
The car is collateral for an auto loan. For mortgages, it is the home that serves as collateral.
Foreclosure
With a mortgage, the lender can foreclose and take ownership of your house if you default. For auto loans, the lender repossesses the car.
Payoff Penalties
Most mortgages have penalties for early payoff. Auto loans typically don’t have prepayment penalties.
Paperwork
Mortgages require extensive paperwork like title transfers and property appraisals. Auto loans have streamlined documentation.
Let’s explore some of these differences in more detail below.
Credit Score Requirements
The credit score requirements for approval will be higher for mortgages versus auto loans. Here are some typical credit score guidelines:
Mortgages
- Good rates: 720+ credit score
- Approval minimum: 620 credit score
Auto Loans
- Best rates: 700+ credit score
- Approval minimum: 550 credit score
As you can see, lenders have higher credit standards for mortgages. Many lenders simply won’t approve mortgage borrowers with scores below 620. But those with lower scores in the 500s can often still get approved for auto financing, albeit at higher interest rates.
Loan Approval Process
The loan approval process takes much longer for mortgages, usually 30-45 days compared to 1 day or less for auto loan approvals.
Mortgage Approval
- Extensive credit report review
- Income and employment verification
- Documentation of assets and downpayment funds
- Appraisal of home value
Auto Loan Approval
- Credit report review but often only one report
- Proof of income
- Evidence of insurance
As you can see, mortgage lenders scrutinize your financials much more closely, hence the longer approval timeline.
Interest Rates and Fees
Interest rates are also quite different for mortgages compared to auto loans. Here are some typical rates for borrowers with good credit scores:
Mortgages
- Interest Rate: 3% to 6%
- Origination Fee: 0% to 2% of loan amount
Auto Loans
- Interest Rate: 6% to 12%
- Origination Fee: None or $50 to $100 flat fee
Clearly, mortgage rates are far lower. But mortgages tend to have upfront fees of up to 2% of the total loan amount. Auto loans don’t have origination fees.
Loan Amount and Term Length
Mortgages have much higher loan amounts and longer repayment terms than auto loans.
Mortgages
- Loan Amount: $100,000 to $1,000,000+
- Term Length: 15 to 30 years
Auto Loans
- Loan Amount: $10,000 to $40,000
- Term Length: 1 to 6 years
The longer term length for mortgages allows for lower monthly payments. But you end up paying more total interest costs over the life of the loan.
Collateral and Liability
Both mortgages and auto loans use collateral, but there are some key differences:
Mortgage Collateral
- The home used to secure the loan
- Foreclosure if payments stop
- Deficiency judgment possible
Auto Loan Collateral
- The vehicle used to secure the loan
- Repossession if payments stop
- No recourse loans, borrower not liable for deficiency
With mortgages, lenders can pursue you for loan deficiency even after foreclosing and selling your home if it does not cover the remaining loan balance. Auto loans are non-recourse, meaning the lender can take the car but cannot come after you for any shortfall.
Payoff Methods and Penalties
How you pay off the loans also differs. Mortgages tend to have penalties for early repayment, while auto loans do not.
Mortgage Payoff
- Monthly payments or lump sum payments
- Early payoff penalties may apply
- Refinancing is an option
Auto Loan Payoff
- Monthly payments remain the same
- Can pay lump sum with no penalty
- No refinancing option
For mortgages, you either make monthly payments over the full term, or pay lump sums with potentially steep penalties. Auto loans can be paid as lump sum with no fees.
The Bottom Line
While car loans and mortgages have some basic similarities as installment loans, they have very distinct differences across loan features like amount, interest, terms, approval process, and payoff options. An auto loan is certainly not the same thing as a mortgage.
The most critical differences to remember are that mortgages require better credit, have lower rates, higher amounts, longer terms, and stricter approval. Mortgages also pose higher financial risks for borrowers if they default. Knowing these key distinctions can help you understand which type of loan best fits your needs as a borrower.
A loan to avoid
There can also still be loans based upon a thing called the “Rule of 78.”
These are simple interest add-on loans with a twist; they are structured to have you pay the interest due on the loan first, then once thats done, your payments will cover the principal.
These should be avoided, since you end up “renting” money during the early years of the loan while your principal doesnt decline. If you should hold the loan to term, there is no difference in total cost when compared to a standard simple interest add-on loan, but if you should need to pay the loan off early, youll find that youll still owe most — if not all — of the original loan you took despite having made payments for some period of time.
Does a Car Payment Affect Getting a Mortgage?
Should you get a car loan or a mortgage loan?
The reason for this is simple: Car loans are big loans. But mortgage loans are even bigger. Lenders take on more risk when lending you the hundreds of thousands of dollars that you’ll likely need to finance the purchase of a new home, so you should expect the application process for a mortgage loan to be far more rigorous.
What is the difference between a mortgage and a car loan?
“Perhaps the biggest difference in the application processes between mortgages and auto loans is the fact that your lender will scrutinize your credit history much more closely whenever you apply for a mortgage,” says Michelle Black, president of Fort Mill, North Carolina-based credit-repair firm HOPE4USA.
Are car loans better than mortgage loans?
In short? Auto loans are a big deal. But qualifying for and closing a mortgage loan takes more effort and paperwork as well as better credit. The reason for this is simple: Car loans are big loans. But mortgage loans are even bigger.
Can you refinance a car if you owe money?
If you need cash, you may be able to borrow with a cash-out auto refinance loan using your car’s equity (the value of your car minus the amount you owe on it). So if your car is worth $20,000 and you have $10,000 remaining to pay on your loan, you could get a refinance loan for $15,000 and take $5,000 in cash.