5 tips to avoid overspending on a car loan

Interest rates for car loans may be declining steadily, but vehicle prices continue to rise. A single mistake during the car-buying process could cost you hundreds — or even thousands of dollars over the life of your loan. Following a few simple tips can help you navigate these often murky waters and prevent overspending on your next car loan.

1. Compare rates before visiting the dealership

One of the most common pieces of advice — and one that bears repeating often — is to get preapproved for a car loan with two or three lenders before you visit a dealership. Not only will this allow you to see what types of rates you can expect, but you’ll also have another tool in your arsenal when it comes time to negotiate. Dealerships are notorious for marking up interest rates to earn a larger profit. When you compare rates before you buy, you can ensure you’re getting the best deal available to you.

2. Opt for a shorter loan term

The longer your loan term, the more you’ll pay in interest. While opting for a lengthy term will lower your monthly repayments, it can cause you to go upside down on your car loan. This means you owe your lender more than your car is actually worth. Although there are 72- and 84-month terms available, Edmunds recommends opting for no longer than a 60-month loan term. And if you’re buying a used car, try to keep your term even shorter: a 36- or 48-month term can save you thousands of dollars over the life of your loan.

3. Focus on the overall price of the car

With 84-month terms available on new cars, keep a strict rule about how much you’re willing to pay overall for the vehicle. Negotiate the actual price of the car without putting too much stock in the monthly repayments. Salespeople try to inflate the price of the car to meet the amount you’re willing to pay monthly by tacking on add-ons you don’t need.

4. Be on the lookout for fees

Before committing to a specific lender, make sure you understand any fees you might be charged on top of interest. Many banks and credit unions charge an origination fee when you first take out a loan, which is often included in your loan’s APR. If you think you might want to pay your loan off early, ask about whether you’ll face a prepayment penalty for making extra repayments. Most lenders also charge a late fee, though you might want to see if there’s a grace period if you miss a payment by just a few days.

In addition to regular fees for borrowing, you’ll also be responsible for sales tax, registration costs and licensing fees. These vary depending on your state, the car you buy and the dealership you choose, so call around to see what it might cost you.

When working with both the lender and dealership, ask for a breakdown of fees. You could negotiate these if you found a more competitive offer elsewhere.

5. Review your terms before signing

Signing a loan contract binds you to it — no matter the terms inside. Before you commit to anything, read through the contact carefully, making note of the interest rate, loan term, fees and monthly payment. Be on the lookout for any language that might be signs of a scam, like extra fees you don’t remember discussing. If anything seems amiss, ask. If your lender or salesperson can’t explain it, you may want to hold off on your purchase until you can find a more reputable provider.

Questions to ask before you take out a car loan

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PenFed Auto Loans			Varies	Starting at 1.79%	3 to 7 years	Active membership with PenFed	Low APR car loans from a well-known credit union.	Go to site More Info	Compare	loading Fetching your data...
Carvana			No minimum credit score	3.9% to 27.9%	Varies	18+ years old, annual income of $4,000+, no active bankruptcies	Get pre-qualified for used car financing and receive competitive, personalized rates.	Go to site More Info	Compare	loading Fetching your data...
car.Loan.com Car Loans			300	Varies by network lender	Varies by lender	Must be a US citizen with a current US address and employed full-time or have guaranteed fixed income.	Apply with a simple online application to get paired with a local auto lender. No credit and bad credit accepted.	Go to site More Info	Compare	loading Fetching your data...
CarsDirect auto loans			No minimum credit score	Varies by network lender	Varies by network lender	Must provide proof of income, proof of residence, and proof of insurance.	Save time and effort with this lending service specializing in beginner-friendly or subprime car loan.	Go to site More Info	Compare	loading Fetching your data...
Auto Credit Express Car Loans			300	Varies	Varies	Must be employed full-time or have guaranteed fixed income of at least $1,500/month and be a current resident of the US or Canada.	Get connected with an auto lender near you, even if you have bad credit.	Go to site More Info	Compare	loading Fetching your data...
Monevo Auto Loans			500	3.99% to 35.99%	3 months to 12 years	Credit score of 500+, legal US resident and ages 18+.	Quickly compare multiple online lenders with competitive rates depending on your credit.	Go to site More Info	Compare	loading Fetching your data...
LendingTree			Good to excellent credit	Starting at 0.99%	Varies by lender	18+ years old, good to excellent credit, US citizen	Compare multiple financing options for auto refinance, new car purchase, used car purchase and lease buy out.	More Info	Compare	loading Fetching your data...
myAutoloan.com Car Loans			550	Starting at 1.89%		550+ credit score, no open bankruptcies, $24,000+ annual income, US citizen or permanent resident, 18+ years old	Get up to four offers in minutes through one simple application. Multiple financing types available including new cars, used cars and refinancing.	Go to site More Info	Compare	loading Fetching your data...

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Bottom line

Getting preapproved for a car loan with a few lenders before you hit the dealership can help you score a competitive deal. But you’ll also want to pay close attention to your loan term and any fees you might be charged to avoid overspending.

You can learn more about how it all works and compare lenders with our guide to car loans.

Frequently asked questions

• How can I avoid overspending after I get my car loan?

  Once you’ve bought your car, keep up with regular maintenance like oil checks and tire rotations. The better you treat your car, the longer it will last. Simply scheduling upkeep can help prevent costly repairs down the road.

• I already have a car loan. Is there a chance I can reduce my costs?

  Yes, you could reduce your costs by refinancing your current car loan with a lender that offers more favorable rates. Just avoid extending your loan term — while it’ll reduce your monthly payment, it would increase the overall cost of your loan in the long run.

• Will leasing a car prevent overspending?

  It depends on whether you’re focused on the long-term or short-term costs. Leases generally have lower monthly payments than car loans, but any equity your car maintains is lost when you return it to the leasing company. This means they’re good for short-term budgets, but are typically more expensive in the long run since you’ll never own the car like you would if you’d financed it. You can learn more with our guide to buying a car versus leasing.