- Put your financing first
- For many individuals, finding money to make an auto purchase usually happens at the end of the buying process. Typically, this is at the dealership after you’ve laid all your cards on the table. In fact, it’s so common to get dealership financing you might not think twice about it.
- But, by making your auto financing a priority and sorting it out before visiting the dealership, you can save thousands of dollars. If you haven’t already, start with some loan basics and explore your financing options.
- Auto loan basics
✔ A car loan can help buyers get the cash they need to get the vehicle they want.
✔ The money that is borrowed (called the principal) gets paid back with interest, over a certain amount of time - known as the loan term.
✔ As you make your regular payments, your principal balance declines until it is paid off.
- Interest rate and loan term
- Your monthly car payments can change depending on the structure of your loan. You’ll have to consider the interest you're paying, and the time you have to pay it back. When the interest rate and loan term increase, you end up paying more money for the same car.
- The interest rate. When you borrow money from a dealership or a creditor they charge interest as the cost of their service. Typically, this is a small percentage of your loan balance but can vary based on your credit history.The amount of interest you pay will reduce as you pay back your loan, but the math can be tricky. It’s best to use an online loan calculator that provides a payment summary, like the one on this page.
- The loan term. Another factor that can dictate how much you pay for a car is the loan term. The term on your auto loan is the time you have to pay back what you borrowed. Most car loan terms are expressed in months, instead of years. The most common terms are between 48 months (4 years) to 72 months (6 years). Typically, your payments will be split into equal monthly portions over the timeframe you choose. When you opt for a longer term, the monthly payment will be lower, but you'll actually end up spending more money this way.
For example, let’s assume you need a $30,000 auto loan, and the rate you’ve been offered is 4.5%.
When the term is 48 months, the monthly payment is $684, and the interest charges add up to $2,837.
By contrast, a 72-month term produces a smaller monthly payment of $476, but total interest charges of $4,288 – for the same car!
- Qualifying for a car loan
- Creditors will consider a variety of factors when it comes to assessing a potential borrower. Here’s what you can expect most lenders to look at:
- Your credit score. Your credit history can let a potential lender know how well you manage your financial obligations. When you have a better credit score, you’ll enjoy a better interest rate.
- Your employment history. When you have a steady employment history, the lender will be more likely to trust you with a loan.
- Your liabilities. The money you owe compared to what you earn, called debt to income ratio, can influence your loan offers. If you have a too much debt, it'll be hard to secure a loan at a reasonable rate.
- The down payment and loan amount. Your down payment can help you get a good rate on your loan. Most creditors will expect you to pay 20% of the car’s price. However, it is possible to find 100% financing for an auto loan.
- The age of the car. Typically, you’ll get a better loan offer on a new car than a used car. Used cars have less resale value if a borrower stops making their payments.
- Your creditor will likely ask for certain documents to prove that you qualify for a loan. You may need to provide things like recent tax returns, job letters, or bank statements. Ultimately, your broker or underwriter will guide you through the process.
- Your financing options
- Many potential car buyers believe that they can only finance their vehicle at the dealership. While this is common, it certainly isn’t the only option. Follow along with the list below to find out different ways to obtain a car loan.
- Dealership. Financing a new car at the dealership is a convenient option for buyers. Once you find a car you like, you can work out your financing to close the deal on the spot. However, it’s usually more costly to finance your new ride through the dealer. Also, keep in mind - it's easy to take on more than you can afford at terms that are less than favorable since you're likely deciding on the fly.
Sometimes it makes sense though. Like when the manufacturer offers 0% financing through the dealership. This can be a great incentive to buy the car you want at a reduced price – if you have stellar credit. Just make sure to read the fine print, some low APR offers might not be effective for the whole loan term. If your interest rate changes, your monthly payments could jump up dramatically too.
- Bank. For most buyers, getting an auto loan from the bank is the best bet. Banks can offer more competitive rates and terms on their loans than most dealerships. You’ll just have to plan ahead and get the loan, or a pre-approval, before shopping. Employing this option allows you to stay within your budget and avoid getting lured into a bad deal at the dealership.
- Home equity loan. Car buyers that already have a mortgage may be able to finance their purchase using a home equity loan. Banks typically lend up to 80% of the home's market value, minus what is currently owed.
- Credit Union. A credit union is also a great choice for your auto loan. You can enjoy lower interest rates at a credit union then you would at a bank. Like banks, credit unions lend based on credit score, employment, and income. The only setback of a credit union is that they tend to have fewer branches than a bank. Since most applications can be completed online or through a broker, this usually isn't an issue.
- Online Lending. Many banks and creditors offer car loans through a web portal. The lending process is much like that of banks and credit unions, with a bit more convenience. Rates can vary and so can the fees, so you may have to shop around to find a good deal with an online lender.
- The financing option you choose will be a personal decision that depends on many factors. It’s important to compare your loan offers to find the lowest interest rate and the shortest term. You can test out offers that you received using the calculator on this page, or play around with market averages to figure out how much you can afford.