Things are changing fast when it comes to how we buy cars and what we want in them.
One thing that hasn’t changed? The importance of knowing how to get a car loan that doesn’t speed off with all your money.
Car Loan Basics: What They Are and How They Work
When you need a car but aren’t in a position to buy one with cash, a car loan can get you moving.
Car loans are secured loans, which means lenders need collateral to give you the loan. In this case, the car is the collateral.
Here’s what that means for you:
The Two Faces of a Car Loan
|Because it’s a secured loan, you can borrow enough to buy a car (and avoid a big cash down payment). You also pay less interest on the loan and have longer to repay it.||If you miss enough payments, your lender is legally allowed to take the car from you (aka repossess it in the middle of the night).|
Car loan: The parts
- Principal balance: It’s the money you borrow to buy the car – before interest is added. You can reduce the principal by making a down payment (not required, but helpful).
- Interest: What lenders charge for borrowing money from them. The rate is usually higher for used cars. A down payment can reduce your interest rate.
- Annual percentage rate (APR): It’s the annual cost a lender charges for a loan, combining interest and miscellaneous fees included in the loan’s terms.
- Repayment term: This is how long you have to pay back the loan. You can choose repayment terms between 3 to 7 years. In lender-speak, that’s 36 to 84 months.
- Monthly payment: Payment includes the principal balance, interest and fees.
- Loan balance: It’s the amount of money you owe on the loan.
Car loan: The fuel
Lenders are fueled by interest, and financing runs on it.
Higher interest rates mean higher profits for lenders and higher loan payments for borrowers.
Luckily, competition between lenders helps keep interest rates from getting out of hand (and that works for us!).
The total cost of a car loan = the car’s purchase price + taxes + interest + fees. Keep this in mind when you’re setting a budget for a car.
How To Shop For a Car Loan: Start Your Engines
To get the best deal on a car loan, you need to be prepared before you reach out to lenders.
Take some time and:
- Decide the maximum monthly payment you can comfortably afford.
- Ask yourself how soon you want to pay off the loan.
- Get to know the types of lenders you can get a car loan from.
- Compare lenders’ current APRs online to get an idea of what’s available.
Once you’ve got your answers, here are the next steps:
1. Look under your credit report’s hood
When deciding what the interest rate should be for your car loan, lenders look closely at:
You can still get a car loan even if you have bad credit (more on that later). If you have a low credit score or a spotty credit history, lenders will charge more interest.
Pour over your credit report. That way, you know what you’re working with. Start with your FICO® score, which most lenders use.
A credit score at or above 660 can usually get you a good APR.
To get the lowest APRs on car loans, including super low ones, like the 0% APR rates dealerships plaster all over their websites, you’ll probably need a FICO® score at or above 750.
2. Comparison shop lenders like you would cars
Your other options include banks, credit unions, and online lenders that specialize in car loans. You may even be able to get a low-interest member deal from your bank or credit union.
When you know all the places to shop for car loans, you can stir up some serious competition for your business.
Lenders will compete over loan terms. Dealers will compete against other dealers’ prices to get you to buy from them.
Here’s what to compare when you’re choosing between multiple lenders:
- APR: This is the key number. A difference in APR percentage could potentially save you hundreds – if not thousands – of dollars over the life of the loan.
- Loan lengths: Look for lenders that offer the loan length (aka repayment term) you want.
- Restrictions: Some lenders won’t finance private deals, cars above a certain age or cars that aren’t valued at a minimum loan amount.
- Digital experience: Some lenders let you do everything online, from the entire loan application to paying your monthly payments. Whether it’s their payment portal or app, some lenders offer a better digital customer experience than others.
3. Get the green light on a loan by getting preapproved 🚦
Getting preapproved for a car loan can help you get a good deal on the car you want.
Apply for preapproval from your favorite lenders. If you apply to all of your faves within a 14-day window, the multiple lender credit checks will only count as one credit check. Past that 14-day window, every credit check will be an additional hit on your credit score.
The lenders will email you a preapproval letter quoting the amount they’re willing to loan you and the APR they’re likely to set.
If you decide to negotiate the car’s price, a preapproval is a pretty powerful tool.
If you apply for preapproval online, consider using a burner number and email address for the application. Otherwise, you’ll get flooded with spam messages. 😱
4. Stay in your preapproval’s lane when you set your budget
Take the numbers from your preapproval letter and plug them into an online car loan calculator. Adjust the repayment term until you find the monthly payment you’re most comfortable with.
Just remember, bigger can be better when it comes to car payments.
If you play around with the repayment term to get the smallest monthly payment, be aware that you’ll pay more in interest, and it’ll take you longer to pay off the loan.
Now, that may work for you because the money you save from that smaller car payment may help you pay off other stuff, like rent or student loans. But, if you can, aim for the shortest repayment term you can afford.
The big thing to remember about your preapproved loan is that you don’t have to borrow the entire amount if you don’t want to.
You’ve got room to negotiate a lower car purchase price or even buy a less expensive car.
How To Apply for a Car Loan: Pump the Brakes – Docs Needed
Once you’ve been preapproved for a loan and you’ve settled on a repayment term that revs your engine (sorry about that), you’ll need to give the lender additional information to apply for the car loan.
The lender might ask you for the following:
- Proof of income and residence (including your driver’s license)
- Details about the car’s age, make and model
- A copy of the purchase agreement
- The car’s registration and title (provided by the dealer)
- Proof of insurance for the car (an insurer can send you this pretty quickly)
But hit the brakes before you apply! See if the dealership’s finance team can get you an even better loan offer. Show them your preapproval and ask if they can beat the APR.
Dealers and their financing partners aren’t known for changing loan terms that work in their favor, but seeing a preapproval from another lender might get them to bend a little. It never hurts to ask!
Once the dealership comes back to you with an offer, figure out which loan best fits your budget. And don’t worry. If you say no to the dealer’s offer, their feelings will not be hurt.
Now, with the fun stuff out of the way, all you have to do is wait for the dealer to get their money, then the car is yours. 🎉
Buy a new car when it costs the least. According to Edmunds, buyers can get an average 6.1% discount on outgoing models in December. Happy holidays!
How To Get a Car Loan With Bad Credit: Take a Detour
Did your application not get approved because you don’t have a credit history or lenders just aren’t feeling your score?
Whether you can’t get a loan application accepted anywhere or the offers you get have a higher APR than you can afford, consider one or more of these options if you have bad credit:
- Make a larger down payment, if you can.
- Boost your credit score.
- Find someone willing to be a co-signer on your loan like a friend or family member.
- Look into leasing a car or fully embracing ridesharing.
- If you have enough cash, buy a temporary ride until you can get a better one.
Stay on the Road: Keep on Trucking With Your (Other) Finances
Your car cost you money to buy and finance, and it’s going to cost you money to fuel, insure and repair. Woo! Fun!
Try to reduce your car loan’s impact on your other financial goals, like paying off student loans or credit card debt, make your car payments on time and build up emergency savings so that you’re prepared for any dings, dents or accidents in the future.
Thanks for cruising through this guide. Now, go have fun scrolling through those car listings! Beep beep! 🚗