Getting an Auto Loan
Getting an Auto Loan
If you're considering purchasing a car or facing challenges with your auto loan management, our unbiased resources and tools are here to assist you. We provide guidance to help you secure the best deal and steer clear of unexpected expenses that could impact your finances.
Which best describes your situation:
I'm getting an auto loan
I'm dealing with auto loan issues
I’m Getting an Auto Loan
Acquiring a new car or securing an auto loan can significantly impact your financial situation. Whether you're a novice or experienced borrower, understanding the right questions to ask and steps to take can help you steer clear of common pitfalls, ensuring you drive off the lot with confidence.
1. Be Informed Before You Shop
Before diving into car shopping, it's crucial to ask pertinent questions. This proactive approach can help you secure favorable interest rates and loan terms within your budget, saving you time, money, and stress in the process.
Begin by asking yourself these essential questions.
How much can I afford?
When searching for a car, it's common to be tempted to estimate your monthly payment solely based on the vehicle's price. However, this approach overlooks various factors that influence your monthly payments and the total amount you'll pay throughout the loan term.
How will my credit impact my interest rate?
Your credit report and scores significantly influence the interest rates offered by lenders for auto loans. Typically, lower credit scores result in higher interest rates, ultimately costing you more over the loan's duration.
You're entitled to a complimentary credit report from each of the three major credit reporting agencies – Equifax, Experian, and TransUnion – every 12 months. Additionally, until the end of 2026, Equifax provides an extra six free credit reports annually. Before shopping for an auto loan, it's wise to review your credit reports to identify and dispute any errors or inaccuracies affecting your credit score, potentially hindering your ability to secure favorable interest rates.
Furthermore, bear in mind that multiple credit inquiries from lenders can impact your credit score. While it's essential to compare loan options, try to limit these inquiries to a span of 14 to 45 days to ensure they count as a single inquiry. If you're working with a dealer, they might approach approximately five potential lenders using your credit information. Therefore, it's advisable to streamline the car-buying process within a few weeks to minimize credit inquiries.
Do I want or need a co-signer?
A co-signer is an individual who agrees to sign onto your loan, assuming the responsibility to repay it if you become unable to do so. For individuals with limited or poor credit history, having a co-signer with good or excellent credit can substantially reduce the interest rate. This is because the lender considers the co-signer's credit history and score when determining the rate.
However, it's essential to recognize that co-signing a loan entails significant obligations. Before asking a parent, friend, or family member to co-sign, it's crucial to have a discussion about the potential outcomes if you encounter difficulties in making payments.
Typically, a lender or creditor cannot insist on having a co-signer, except in cases of joint credit applications.
How much is my trade-in worth?
If you own a car or vehicle that you plan to trade in, you can estimate its value by consulting various reputable third-party websites such as Consumer Reports, Edmunds, Kelley Blue Book, and NADA Guides.
Once you have determined its approximate worth, you can explore two options: trading it in or selling it privately. When you trade in your vehicle, you negotiate with the dealer to determine the value that will be deducted from the purchase of another car. On the other hand, selling it yourself allows you to receive cash, which you can then use as a down payment. Both approaches reduce the amount you need to finance, so your decision between a trade-in and selling it privately should be based on which option provides you with the most savings.
By answering these questions, you’ll make an informed choice before entering into a new auto loan.
2. Explore Different Financing Options
When it comes to financing a new vehicle, you have various options to consider. Familiarize yourself with the most common methods of obtaining an auto loan and learn how to compare interest rates and terms to identify the best fit for your financial situation.
Discover more about the available ways to finance your loan.
There are several common avenues for obtaining an auto loan, including through your car dealer or a bank or credit union. Understanding the distinctions between these options and knowing how to compare their offers can help you secure the best loan for your needs.
Here are the key considerations at this stage:
1. Dealer-Arranged Financing:
- The car shopping process often starts at the dealership, where you may be offered financing options. This indirect auto financing involves the dealer acting as a middleman between you and potential lenders.- Dealers typically submit your information to multiple lenders to secure financing offers. These offers include a "buy rate" from the lender, which comprises the base interest rate plus additional fees.- You can inquire about alternative offers from other lenders to ensure you're getting the best deal in terms of interest rates and loan terms.
2. Bank or Credit Union Financing:
- Alternatively, you can directly approach a bank or credit union for auto financing. This option allows you to shop around for different interest rates and loan terms.- Getting preapproved by a bank or lender is the first step. This provides you with a loan quote, including interest rate and loan amount, based on factors like creditworthiness.- Comparing offers from different lenders, including those from dealerships, can help you make an informed decision.
3. Buy Here, Pay Here Dealership Financing:
- Some dealerships offer in-house financing, particularly catering to borrowers with no or poor credit histories. These "Buy Here, Pay Here" dealerships may advertise lenient credit requirements.- However, interest rates at these dealerships tend to be higher, so it's essential to weigh the overall cost of the loan against the benefits of the vehicle.
When comparing auto loan options, consider using tools like our auto loan worksheet to evaluate financing offers from different lenders. Additionally, be sure to check and compare auto loan interest rates, which are expressed as percentages and include both the interest rate and the APR (Annual Percentage Rate) encompassing interest and fees.
Lastly, familiarize yourself with your rights as a borrower under the Equal Credit Opportunity Act, which prohibits discrimination based on certain factors. Lenders are also required to provide written disclosures outlining the terms of the loan, including the APR, finance charge, and total payments, to ensure transparency and compliance with lending regulations.
3. Understand Negotiation Opportunities
Did you know that you can negotiate the terms of your auto loan? Engaging in negotiation can potentially save you hundreds or even thousands of dollars over the loan's duration, making it a critical step in the car-buying process.
Learn more about the basics of negotiating loan terms.
What aspects of a car purchase or auto loan are negotiable?
Negotiating certain terms and features of your auto loan can lead to substantial savings, potentially amounting to hundreds or even thousands of dollars over the loan's duration.
Apart from the vehicle's price, various factors associated with the auto loan are open to negotiation or influence. These elements collectively affect your monthly payments and overall loan costs, offering opportunities for cost reduction and long-term savings.
Here's what you can negotiate when it comes to auto loans:
1. Annual Percentage Rate (APR) and Interest Rate:
- Securing a lower interest rate and APR translates to reduced borrowing costs and lower total payments over the loan period. Comparing quotes from multiple lenders before finalizing a deal can help you obtain competitive offers and potentially negotiate better terms.
2. Loan Term:
- Shortening the loan term results in fewer monthly payments and lowers the overall loan cost. Conversely, longer loan terms may reduce monthly payments but increase the total interest paid over time, potentially leading to negative equity if the vehicle's value depreciates rapidly.
3. Prepayment Penalty:
- Some loans include penalties for early repayment. Negotiating to remove prepayment penalties can save you from incurring extra fees if you decide to pay off the loan ahead of schedule.
4. Optional Add-On Products:
- Various add-on products, such as extended warranties, GAP insurance, or service contracts, are negotiable but optional. While these products may enhance your vehicle's protection, they increase both monthly payments and the total loan amount.
5. Vehicle Trade-In Value:
- If you plan to trade in your current vehicle, research its approximate value using reputable online resources like Consumer Reports or Kelley Blue Book. Compare trade-in offers from different dealerships against selling the vehicle privately to determine the most advantageous option.
Negotiating these aspects of your auto loan empowers you to secure favorable terms, minimize costs, and make informed financial decisions when purchasing a vehicle.
4. Master the Art of Closing the Deal
Before driving away with your new car, there's still a significant amount of paperwork to review and sign. Ensure that all documents align with the agreed-upon deal and that every party involved has signed the necessary paperwork. This final step ensures a smooth transaction and a confident exit from the dealership.
What should I consider before finalizing a car or auto loan?
As you approach the final stages of securing your auto loan, it's crucial to carefully review all aspects of the loan agreement before committing to it. Here's what you should know before signing on the dotted line and driving off the lot:
1. Verify the Agreement:
- Ensure that all the terms and conditions outlined in the loan agreement align with what you discussed and agreed upon during negotiations. The federal Truth in Lending Act (TILA) mandates lenders to furnish written disclosures detailing essential loan terms, such as the Annual Percentage Rate (APR), finance charges, amount financed, total payments, and total sale price. Take time to review each detail and ask questions if anything is unclear.
2. Complete Paperwork:
- Before leaving the dealership, ensure that all paperwork is properly filled out and signed by both you and the dealer. Confirm that you've received copies of all documents, and decline to sign any blank or partially filled forms. Whether receiving printed or electronic copies, ensure they are in a format that's easily accessible, savable, or printable.
3. Post-Transaction Details:
- After driving away with your financed vehicle, expect to receive introductory communications from your lender. These messages typically contain essential information regarding payment submission methods and due dates. It's imperative to make timely monthly payments to avoid late fees, potential repossession, and adverse effects on your credit score.
By meticulously reviewing your loan agreement, completing all necessary paperwork, and staying vigilant about post-transaction responsibilities, you can navigate the car financing process with confidence and ensure a smooth ownership experience.