Auto loans are a great way to get a new car or truck, but they can be confusing. If you’re in the market for a new car or truck, you’re likely also shopping for an auto loan. Your auto loan will affect your monthly budget for the full term of the loan, so it’s important to do your research and make an informed decision before finalizing it. Here’s all you need to know about auto loans and how to choose the one that’s best for you.
How do auto loans work?
Auto loans make it possible for consumers to purchase a new car without having all the cash on hand when buying. With a car loan from a financial institution or private lender, you’ll receive the funds you need to purchase the vehicle in one lump sum, which you’ll pay a portion of back each month, with interest, over the term of the loan, which generally lasts 5-7 years.
Where do I apply for an auto loan?
There are two main sources for auto loans:
- Direct lenders include banks, credit unions, and online lenders. You’ll likely have the opportunity to get pre-approved for a vehicle loan through these lenders, which can make your car shopping quick and easy.
- Dealership financing allows you to purchase and finance your care in one central location. A dealership loan may be accompanied by a higher interest rate and enticing offers for upcharge add-ons and/or extra protection that may not be worth the price.
How high will my monthly payment be?
Your monthly auto loan payments are determined by several factors:
- The amount of the loan. The amount of loan you’ll need will depend on the value of your trade-in, the make and model of the car you’re purchasing, and whether or not you already have a loan on your old car to pay off. A great minimizer of the overall cost is making a sizable down payment and/or trading in your old vehicle when buying a new car.
- The annual percentage rate. APR is the effective interest rate you pay on your loans. It’s determined by your credit score and other general creditworthiness or financial wellness factors.
- The loan term. The default length of most auto loans is five years, but some lenders offer to stretch the term to seven years or even longer. A longer-term loan means paying less each month, but it also means paying more in overall interest throughout the life of the loan. A shorter-term loan also means you’ll own the car fair and clear sooner.
How can I score the lowest interest rate on my auto loan?
The interest rate on your auto loan will directly affect your monthly payments throughout the loan term. Follow these tips to score the lowest rate possible:
- Improve your credit score before applying. A good credit score can put you in line for loans at better interest rates. Before you get a loan, there are a few things you should do to boost your credit score. These include paying your bills on time, working to pay down your balances, not opening too many new accounts, and reviewing your report for fraud.
- Borrow less than you qualify for. While it’s tempting to max out your eligibility when taking out an auto loan, consider borrowing less than you qualify for if you want to keep your interest rate low.
- Save up for a larger down payment. If you don’t have a substantial down payment saved up, waiting a few months to secure one will save you money, as you’ll be borrowing less and likely qualify for a lower interest payment.
As exciting as it might be to jump into a new vehicle, it’s important to do your research on auto loans before committing. Let our guide help you understand how your loan impacts your monthly budget and how to make a responsible decision.