What You Need to Know About Auto Loans

More than 100 million Americans have auto loans with financing on the rise. New cars cost over $30,000 on average, which necessitates financing for most people. Even used cars can be costly at more than $18,000 on average. Auto loans typically have a term of 3 to 5 years with competitive interest rates compared to other types of loans. This can make it easier to afford the purchase of a vehicle, especially with a down payment that can reduce the risk of becoming underwater on a car loan.

There are many places to get auto loans today. Many consumers believe the dealership is their only option, but dealers usually offer the worst deals for buyers because most buyers arrive unprepared for financing. National banks are the largest providers of auto loans and may offer the best deals for well-qualified buyers, but there are other options. “Captive” finance companies that belong to automakers like Ford and Honda usually offer the best deals because the automakers subsidize the loans. It’s also important to check with other lenders like local banks, credit unions, online lenders, and peer-to-peer networks.

Before shopping for an auto loan, make sure you’re armed with knowledge to come out ahead with the best deal. Think of your car loan as completely separate from the car itself to properly compare your options.

1. Compare

Not all loans are created equal. Even two loans with identical monthly payments may have vastly different terms that affect the long-term affordability of the loan. Focusing solely on the monthly payment can lead to a bad deal. To get the top loan for your needs, there are a variety of factors to consider:

  • APR. There’s a difference between the interest rate and APR on your loan. An annual percentage rate is a broader measure that includes other costs to borrow the money such as fees.
  • Term. The longer the term, the higher the cost of your loan, even though your monthly payments will be lower. A 3-year loan will cost less overall than a 5-year auto loan.
  • Prepayment penalties. Some car loans come with a major drawback: a prepayment penalty that is charged if you make extra payments or pay off your whole loan early. These prepayment penalties are designed to ensure the lender gets their full profit and it can prevent you from saving on interest charges or finding a better deal later.
  • Fixed or variable interest. A fixed rate will stay the same for the length of the loan for predictable monthly expenses while a variable interest rate can change and result in higher payments later.

There are many sources for auto loans, so compare loan quotes from banks, credit unions, online lenders, and dealerships. If you have excellent credit, a bank is likely to give the best rate whereas dealerships typically offer the top deals for borrowers with flawed credit who can’t get approved elsewhere. Dealers usually don’t offer the best deals, so it’s important to understand your options before you step foot on the lot. This will also give you bargaining power when it’s time to negotiate.