Auto Loan Tips & Advice

What is an Auto Loan?

An auto loan is a secured loan where the vehicle serves as collateral. This means lenders can offer lower interest rates compared to personal loans because they can repossess the car if you default on payments.

New vs Used Car Financing

Typical Auto Loan Terms

Auto loans typically range from 24 to 84 months, with 60-72 months being most common. The loan amount can be up to 100% of the vehicle's value, sometimes more for qualified buyers.

Get Pre-approved for Financing

Getting pre-approved gives you negotiating power and helps you set a realistic budget. You'll know your interest rate and maximum loan amount before stepping foot in a dealership.

Know Your Credit Score

Your credit score significantly impacts your auto loan rate. Check your score and address any issues before applying for financing.

Set Your Total Budget

Consider the total cost of ownership, not just the monthly payment. Factor in insurance, maintenance, fuel, and registration costs when setting your budget.

Compare Multiple Lenders

Don't just accept dealer financing. Compare rates from banks, credit unions, and online lenders. Credit unions often offer the most competitive rates.

Understand Dealer Financing

Dealers often mark up the interest rate they receive from lenders to make a profit. Having pre-approved financing gives you leverage to negotiate a better rate.

Watch for Rate Shopping Window

Multiple auto loan inquiries within 14-45 days typically count as one inquiry on your credit report. Shop around aggressively during this window to find the best rate.

Benefits of a Larger Down Payment

A larger down payment reduces your monthly payments, total interest paid, and helps you avoid being "upside down" on your loan (owing more than the car is worth).

Maximizing Your Trade-In Value

Your trade-in can serve as part of your down payment, but research its value first to ensure you get a fair deal. Consider selling privately for potentially more money.

Gap Insurance Considerations

Gap insurance covers the difference between what you owe and what insurance pays if your car is totaled. Consider this if you put little money down.

Short vs Long Loan Terms

While longer terms offer lower monthly payments, they cost significantly more in interest and keep you underwater longer. Choose the shortest term you can comfortably afford.

The True Cost of Extending Terms

Extended loan terms can cost thousands more in interest. Here's how much difference loan term can make on a $25,000 car loan at 6% APR:

Making Extra Payments

Making extra principal payments can significantly reduce your total interest and help you pay off the loan faster. Even small extra amounts make a big difference.

New Car Financing Advantages

New cars often come with promotional financing rates, longer warranties, and the latest safety features, but they depreciate rapidly.

Used Car Financing Benefits

Used cars offer better value with slower depreciation, but may have higher interest rates and shorter loan terms available.

Certified Pre-Owned (CPO) Programs

CPO vehicles offer a middle ground with manufacturer backing, extended warranties, and often special financing rates while avoiding the steepest depreciation.

Focusing Only on Monthly Payment

Dealers often ask "What monthly payment can you afford?" This focuses attention away from the total cost. Always negotiate the total price first, then discuss financing.

Rolling Negative Equity

If you owe more than your current car is worth, rolling that negative equity into a new loan puts you even further underwater and increases your financial risk.

Expensive Add-Ons and Warranties

Dealers make significant profit on extended warranties, paint protection, and other add-ons. Research these separately and negotiate their prices.