Putting as much effort into getting a car loan is as important as finding the perfect car. Since no loan is perfect for every financial situation, you have to do your homework. Getting a bad deal may force you into paying extra every month or cost you more over the life of your loan.
6 questions to ask before getting a car loan
To find the best deal, you have to ask questions. Here are the top 6 car loan questions you should ask yourself before getting a car loan.
When applying for a car loan, your credit score can open doors to great rates or slam them shut. It largely determines how much you can borrow and at what rate.
Your credit score encompasses your payment history, how much debt you owe, how long you’ve had each of your active credit accounts and the types of financing you have. Generally, the higher your credit score, the lower your rate will be.
If you have no credit or poor credit, you may want to take these steps to improve your score before shopping for a car. Even if you can qualify for a higher rate without raising it, the extra work to improve it can result in lower interest and keep the overall cost of your loan down.
Typically, a 20% down payment is the magic number when applying for a car loan. However, it can be difficult to come up with that much money.
A down payment on an auto loan should be an amount you can reasonably afford without draining your emergency savings account. Provided it has enough value, your trade-in can also serve as your down payment — or at least a sizable portion of it.
When you know how much you can afford, you can gauge how much car you can get. If you can’t afford the monthly payments on the loan, you risk default, which can damage your credit score for years.
A general rule is that if you can’t afford the monthly payments, you probably can’t afford the car. Use our car loan payment calculator to help you understand what kind of vehicle fits your budget.
Some lenders allow you to pay off your loan earlier than what’s outlined in the terms of your loan agreement. Just be careful to avoid those that charge a prepayment penalty for doing so. If your loan has no penalties, paying off your loan faster than planned can save you a substantial amount of interest.
For car buyers, auto loan interest rates vary based on credit score, age of the car being financed, term length of the loan and other risk factors. Currently, the average annual percentage rate (APR) for new car loans is between 4.23% and 14.7%. For used cars, average APRs range from 4.77% to 20.09%. This is according to data from Experian’s State of the Auto Finance Market report from the second quarter of 2019.
Interest rates can also vary depending on your car loan term. On average, terms can range from two to seven years. Keep in mind that some lenders will charge lower rates for longer terms. Others, like many credit unions, may charge a higher rate if you go for a longer term.
New cars can be expensive and depreciate sharply in the first couple of years — sometimes as much as 30% to 40%. That means you can quickly end up with a car that’s worth less than what you owe on it if you have a longer loan term.
Used cars are often much less expensive, which means your loan will also be less expensive. The downside is that you don’t always know what you’re getting into, so take a test-drive before you buy. It may save you money in costly repairs later on.
4 tips to comparing lenders
It pays to shop around when you’re looking for the best car loan. Knowing these four tips is a move in the right direction.
Prequalify. While it’s not a guarantee your application will be accepted, prequalifying for an auto loan can give you the rate and term you might qualify for without a hard credit pull. This allows you to compare several providers without taking as many hits to your credit score.
Compare apples to apples. In general, the interest rate you get depends on your income, credit score, the loan term you choose and the vehicle. Make sure any rates you’re comparing have similar loan terms and that the vehicle and your personal and financial information is the same.
Make sure there are no restrictions. Some lenders will only write a car loan when you purchase a car from a network of partnered dealerships. Others won’t lend money if you purchase a vehicle from a private seller, or won’t refinance your current vehicle. Lenders may also exclude vehicles with high mileage or specific car makes.
Don’t just go with dealership financing. Dealerships often charge a higher interest rate than what you can qualify for elsewhere and likely shouldn’t be your default choice.
Documents to bring when you apply
Have the following ready when you apply for a car loan:
Drivers license or another government-issued ID
Recent pay stubs and bank statements
Proof of residence — usually a utility bill, mortgage payment or similar document that has your full name and residential address
Vehicle information — including the make and model, year, VIN number and purchase price
Method of payment for your down payment
Current vehicle registration if you’re trading in your vehicle
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
When shopping for a car loan, you’ll want to weigh the total cost with the monthly payment you can afford. It pays to shop around. It also pays to compare different types of auto loans and different lenders.
Yes. Most car loans are secured with the value of your car. You don’t actually own your car’s title until you’ve paid off your loan. That means if you stop making payments, it can be repossessed.
Some lenders accept cosigners and others don’t. That’s one of the reasons why it pays to shop around.
Absolutely. Refinancing can offer you a better rate and lower your repayments. Some lenders, however, don’t offer loans for refinancing. Find one that does with our guide to auto refinancing.
The annual percentage rate is often considered the true interest rate of a car loan. It factors in any fees that contribute to the yearly cost of the loan and the base interest rate, which makes it a better way of measuring the true cost of the car loan.
Kathryn Pomroy was a writer for Finder, specializing in loans. She has written for dozens of major publications, small businesses and many well-known personal finance companies, including LendingTree, Money Crashers, Quickbooks/Intuit, BankRate, LendEDU and more. Kathryn holds a BA in Journalism and drinks super bold coffee while eating peanut butter and honey toast.
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