Auto loans are generally unsecured loans. Cars are a major purchase for most people. Banks and credit unions usually offer car loans as a type of personal loan, but there are other sources of car finance. In fact, many car manufacturers have developed their own in-house banks. Volkswagen Bank was founded in 1949. The largest US car manufacturer General Motors acquired a finance house which is now its in-house bank.
Barclays UK offers car loans at rates between 7.3% and 20.0% for a term of two to five years, which compares with a personal loan offering of between 7.9% and 20.9% for a maximum term of five years.
Major auto manufacturers have popularised the personal contract plan (PCP), where buyers pay a deposit and make a monthly payment, usually over three years, at which point they have the option to return the car and start a new contract, or pay a lump sum to acquire the vehicle.
In the US between 2010 and 2020, Santander Consumer USA became the biggest lenders into the subprime auto lending market. Borrowers are assigned categories from credit bureau, with prime borrowers and subprime borrowers. Subprime borrowers are considered riskier and lenders can generate more profits from subprime loans. In 2020, Santander Consumer USA settled a case brought by 33 states for $550 million and agreed to change its underwriting practices.
A news report from Reuters at the time said that Santander had profited by approving high-cost loans to disadvantaged auto buyers who had a high likelihood of defaulting: “California said Santander approved loans it expected would default at rates of greater than 70% and alleged ‘Santander’s aggressive pursuit of market share led it to underestimate the risk associated with loans by turning a blind eye to dealer abuse’.”