How to Get the Best Car Loan
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Some consumers will spend days making sure they get the lowest price on a car but neglect to shop for the best auto loan.
That's a mistake.
Car shoppers who don't have financing in place when they visit the dealership to buy are vulnerable to whatever terms the dealer offers, which might have a much higher interest rate than they could get elsewhere. And because dealers often mark up the interest rate of a loan above what shoppers actually qualify for, those buyers could wind up spending hundreds of dollars more over the course of the loan.
Ultimately, if you're looking for a car loan, you'll want to balance its total cost with the monthly payment you can afford. But focusing on the monthly payment could increase the chance that you'll end up with a bad deal. Be smart: Determine what you're willing to spend before setting your sights on your dream machine.
For more information, read "How Much Can You Afford to Spend on a Car?" and "Where to Shop for a Car Loan."
Below are CR's tips on what to look out for when getting a car loan.
Keep an Eye on a Loan's Total Cost
When comparing auto loans, the figure to focus on is the annual percentage rate (APR). A lower rate can produce significant long-term savings. For example, a three-year $15,000 loan with a 5 percent APR would save you almost $500 overall compared with the same loan at 7 percent.
Another key consideration is the length of a loan, which can significantly affect both your monthly payment and the total cost of your financing. A shorter term means higher monthly payments, but less money will be paid overall. Try to keep the length of the loan as short as you can afford.
A three-year loan costs far less overall than a five-year loan. For example, if you borrow $15,000 at a 6.5 percent APR for 36 months, your monthly payment will be $460 and the total interest will be $1,550. The same auto loan stretched out to 60 months would lower the monthly payment to $293—more than $160 less—but nearly doubles the interest you'll pay to $2,610, an increase of $1,060. And that doesn't even take into account that longer loans often come with higher interest rates.
Long-term auto loans also lengthen the time before you begin building equity in the vehicle. For example, with a 60-month loan, it might take 18 months of payments or longer before the car is worth more than you owe on it. This means that if you want to trade in or sell the car early, the price you'll get won't cover the amount you still owe, a situation that's often called being upside down. The same is true if the car is stolen or destroyed; your insurance payment probably won't be enough to pay off the remainder of your loan.
Shorter loans reduce the amount of time you can be under water. For example, with a three-year loan, you could build thousands of dollars of equity in the vehicle by the end of the first year.
You can avoid being upside down by making a significant down payment. We recommend that you have a trade-in or down payment of at least 15 percent of the total cost when financing the purchase of a new car.
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