Buying a brand new car is exciting. But deciding what you buy and how much you’re going to spend takes time. Budget out the cost and compare lenders to get the best deal.
How do new car loans work?
New car loans are typically secured term loans backed by your new vehicle. Generally, you can borrow between 80% and 100% of your vehicle’s value and cover the rest of the cost up front.
Once you get your funds either through a dealership or third-party lender, you pay it back plus interest and fees in monthly installments. Usually, it takes between two and five years to pay off a car loan. If you fall behind on your payments, your lender can repossess your vehicle.
Secured car loan. Most car loans use the new car as collateral in case you default on payments. The interest rate is typically less than what comes with an unsecured loan because there’s less risk for the lender.
Unsecured car loan. An unsecured loan doesn’t hold the car as security. You typically need good or excellent credit to qualify for favorable unsecured rates.
Variable-rate car loan. With a variable-rate car loan, interest rates can increase or decrease according to the lending market. The variable rates can potentially be cheaper or more expensive than fixed rates.
Fixed-rate car loan. A fixed-rate car loan locks in an interest rate throughout the term of the loan — giving you certainty that payments won’t change.
Bad-credit car loan. If your credit history has suffered a few black marks and you need a new car, you can consider a bad-credit car loan. These loans often come with higher interest rates due to higher risk.
New car loans don’t have to be for brand-new cars — the majority of lenders accept a vehicle up to two years old from a dealer or private sale as well.
What’s a good interest rate on a new car loan?
Anything below 5% is considered a good interest rate on a new car loan. However, you won’t be able to qualify for a good rate on a car loan unless you have good to excellent credit.
How to find a competitive rate on a new car loan
Here are some factors to consider when comparing loans for a new car:
Interest rate and APR. These two rates pinpoint how competitive a loan is. An APR includes interest and all fees to let you know exactly how much you’ll have paid at the end of the loan term.
Other fees and charges. These extra costs could range from loan origination to early termination fees. The lender should be transparent about any fees before the agreement is finalized — always read the terms and conditions before signing.
Prepayment penalties. It varies by lender, but you may be able to repay your loan earlier without paying any fees. Be sure your loan doesn’t come with any fees for early repayment that could change the overall cost of the loan.
Loan amount. You should also check the minimum and maximum loan amounts to ensure the loan is right for your needs.
Other factors to consider
Down payment. Typically you’l have to make a down payment of 10% to 20% of the new car’s value. Doing so can help you save on interest.
Loan term. While it might be tempting to get a 72-month car loan, the longer your loan term, the more you’ll end up paying in interest.
Sales tax. Make sure your lender is including the sales tax when estimating the value of your car.
Calculate how much your car loan will cost
Pros and cons of a new car loan
Lets you purchase a new car without paying for it all at once
New cars are generally easier to finance
Can help build credit if the loan is maintained properly
Interest rates are generally lower on new car loans
Promotional 0% rates may apply if your credit score is high
New cars depreciate in value quickly
It’s another payment to manage in your monthly budget
If your loan isn’t large enough, you’ll need to front the rest of the cost
3 questions to ask before you get a new car loan
What’s the final cost? It’s essential that all the costs associated with the car loan are established with the loan provider. The obvious costs are the interest rates, but there are other costs too — these may vary depending on the lender.
What type of loan makes sense? Fixed interest rates are common with car loan companies and won’t change throughout the loan period. It’s more uncertain choosing a variable interest rate, as the loan provider could adjust the interest rate at any time depending on the market.
Can I pay the loan in full early? Early payment fees should be negotiated with the loan provider just in case your situation changes throughout the loan period.
New car loans typically come with lower rates than used car loans since a newer vehicle will be worth more to a lender should you default. You typically have a larger selection of lenders to choose from as well.
If you can show a source of income and have a healthy credit score, you should be eligible for a loan if you’re retired.
It’s possible to get a new car loan with bad credit. But you’ll likely end up with higher rates and terms than your good-credit counterparts. Instead, consider getting a new car loan with a cosigner to offset
The lender preliminary agrees to offer you a loan pending final verification which usually includes a hard credit check. Apply for preapproval for a car loan to help you determine how much you can spend.
New car loan terms generally vary from three years to seven years.
Matt Corke is Finder's head of publishing for rest of world and New Zealand. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time, he has survived the dot-com crash and countless Google algorithm updates.
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