Cars can be expensive. The average price of a used car is now more than $25,000, and the price of a new vehicle has surged by 5.8 percent in the past year to well over $40,000.
If you need a car and don’t have tens of thousands of dollars lying around, you’ll need to look into auto loans. These allow you to break up the purchase price into smaller, more manageable payments to make over time.
Car dealerships offer financing, as well as banks and online lenders, if you prefer to buy a car from a private seller. Understanding your finance options and how to qualify can help you get a car loan with better terms.
Each lender has its own eligibility requirements for auto loans, but in general, you can prepare by making sure you have:
To get a car loan with the best interest rate and terms for your situation, it’s important to follow certain steps. These 6 steps will help simplify the auto loan process.
Step 1: Check your credit
Whether you’re looking to finance a new or used car, the lender will run your credit, so you’ll want to check your score in advance to see where you stand. A higher credit score can help you qualify for lower interest rates for your auto loan.
You can check your credit online or download a free credit report from AnnualCreditReport.com. Make sure your report doesn’t have any errors that you’d need to dispute.
When reviewing your credit score, see if there’s any room for improvement, such as paying down a particular debt or lowering your credit utilization.
Step 2: Assess your financial situation
Review your budget and current bills to see how much you can afford to borrow for a car. Consider if you could manage a $350 or $450 monthly payment on top of your current living expenses.
Determine whether you have enough saved for a down payment. Also, consider the entire cost of financing a car. The monthly payment is one aspect, but you also have to consider taxes and additional fees, interest charges, auto insurance, and any ongoing maintenance costs or repairs.
Step 3: Compare loan options and gather quotes
Next, determine which loan option would work best for you. Dealerships provide several options and have access to financing through multiple lenders. However, they usually add on fees and increase your interest rate to compensate themselves for handling your financing.
You can go directly to banks or credit unions and apply for an auto loan. This helps you avoid the markup from the dealer, and you can get prequalified first to shop around and compare quotes. Online lenders may provide auto loans as well and allow you to get a quote online before applying.
Finally, there’s “buy here, pay here” dealership financing, which is the most expensive but could be helpful if you have no credit or bad credit. These auto lenders simplify the process by financing your loan with fewer requirements, but often at a higher interest rate, which increases the overall loan cost.
Related: Learn more about getting a personal loan
Step 4: Shop for your car
Once you know which lending option suits you best, it’s time to start looking for a vehicle. Visit local auto lots, search for cars online, or both. Shopping online allows you to compare prices and features. You may even see cars from private sellers that you can consider.
One benefit of buying a car from a local dealer is that they offer certified pre-owned vehicles, which are used cars that undergo and pass a comprehensive inspection.
Step 5: Get ready to negotiate
When you find a car you like, you may be able to negotiate a lower price or more favorable loan terms, which could save you a significant amount over the life of the loan. If you have a vehicle to trade, you may want to negotiate the amount the dealer will give you for it.
You can also suggest lowering the price of the car or your interest rate if you forego option features such as an extended warranty or gap insurance.
There are some things you can’t negotiate related to the sale, such as the taxes, title, and registration fees which are set by the local government.
Step 6: Understand your loan terms before signing
Before you sign your loan agreement, make sure you’re clear on the terms. You should understand and agree with:
Direct auto financing means you borrow money from a bank, credit union, or finance company. With direct financing, the lender provides you with a loan amount you’re responsible for paying, plus interest. You can then take the loan to a dealer and use it to buy a car.
Direct financing allows you to shop around different dealers and get your credit terms in advance instead of only talking with one dealership.
Indirect auto financing, also known as dealership financing, is when the lender provides the loan funds to the vehicle seller (dealership) instead of directly to the buyer. With this type of financing, you apply for an auto loan through the dealership, and they find a lender willing to finance your purchase.
Then, you and the dealer enter a contract where you pay them back the loan plus interest. Indirect auto financing provides you with multiple options from different banks and lenders in their network. The downside is that you may pay a higher interest rate or more fees than if you used direct auto financing.
Learn more about auto loans with answers to the following questions.
Each lender has its own requirements and borrowing limits, but they’ll typically consider factors like your income and credit score when determining how much you can borrow.
The average auto loan repayment term is around 72 months.
Yes, you can get an auto loan for a previously owned car. Used cars tend to cost less since cars depreciate in value over time. The process of financing a pre-owned car is very similar to financing a new car.
Related: Learn more about getting a personal loan