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Road map for navigating auto loans

  • 6-min read

To find the best deal on an auto loan, get your finances in order, do your homework, and follow our tips to help smooth the road.

Blonde child in a mini orange corvette drifts out of a driveway

Whether you live it up in the city or commute from the ‘burbs, buying a car is a major rite of passage. Wheels give you the freedom to move around town or take road trips to the mountains, beaches, or summer music festivals. Can’t you just feel the wind on your face? But hold up. Before you can drive away, you need to finance that new ride. We have tips to navigate the financing process and save on auto loans. 

So you found the right car … and need a loan.

Maybe you’ve always known your dream car (BMW X3 anyone?), or you’ve spent weekends test-driving everything from Audis to VWs. But once you’ve found the right car, you need to figure out how to pay for it. With new and used car prices sky high, most customers can’t just stroke a check, so most of us who are getting a car will need to finance. Thankfully, there are plenty of auto financing options. If you’re prepared, you might ‌save a bit of cash. 

How your credit score can affect your rates

When you’re focused on car shopping, you may not be thinking about your credit score. After all, isn’t that something that applies to credit cards and mortgages? Yes, but. Your credit score plays a key role in any debt or loan you are applying for, and that includes auto loans. The higher your credit score, the better loan terms you can expect.

If you have a score of 750 or higher—well done you—you should have access to the best interest rates and fees from multiple lenders. However, if your credit score is low, don’t despair, you can still find car financing, you just may pay higher rates and have to search around for decent terms.  

You can get a car loan with bad credit, but shop around with dealers, online lenders, credit unions and banks, and “pay as you go” auto sellers, which extend their own financing but usually charge sky-high rates.

Pro tip: If your credit score isn’t where you’d like it to be and you’re in the market for a car, spend a few months or more working on improving your credit. You can do that by paying down existing debt, limiting the amount you charge to your credit cards, and holding off on applying for any new cards. Wait until your score improves and then go out shopping for a car loan.

6 tips for auto financing

It’s never fun to add another bill to your monthly budget, but a car is both a practical and exciting purchase. Oh, the places you’ll go! But first you need to secure financing. To help ease the pain, we’ve identified six auto financing tips.  

Keep the loan term as short as possible

When you take out any loan, you’re borrowing a chunk of money and paying interest on that amount. The longer the term of the loan, the more interest you’ll pay. Conversely, the shorter that period, the less interest, and the lower your total costs. With an auto loan, if you can shorten your timeline, you’ll save hundreds or even thousands of dollars in interest during the loan. However, a shorter term will likely mean higher monthly payments, so make sure your budget can handle it. Only agree to a term and amount that you can comfortably pay each month.  

Minimize the principal

On ‌savings, the less money you have to borrow to buy that new plug-in hybrid, the better. If you minimize the principal on your loan with a larger down payment, you’ll have more manageable monthly payments. 

Let’s talk about auto financing costs. If a new vehicle costs $40,000 and you can put down $5,000, your principal will be $35,000. If you borrow that amount at 5% for five years, your monthly payment will be about $660 per month. If you can come up with $15,000, that monthly nut drops to about $471.

Considering buying a car with a credit card? Think again. Some dealers accept credit cards for down payments or the full cost, but they may charge a service fee. Also, only charge what you can pay off. Credit card interest rates are significantly higher than most car loan rates, and you could pay a lot more in interest if you can’t pay off the credit card balance.

Upgrade, within reason

We get it. You want the nose-to-tail moon roof X1, shiny alloy wheels, and fancy Harman Kardon or Bose sound system. But those upgrades get expensive. The more you pimp your ride, the more it will cost you. When you’re shopping, set a budget and stick to it. If the higher trim levels sway you, you’ll need to take out a larger loan. So if you can afford it, go for the fancy ride. If not, check out the base models.

Be wary of gap insurance

Gap insurance, or guaranteed asset protection, is an optional product that can help you cover a loan balance. It covers the “gap” in value if your car is stolen or totaled, or if you owe more on your loan at the end of the term than the car is worth. How can that happen? A car is a depreciating asset, and most cars lose 20% of their value in the first year. It’s scary to think you could owe more than the value of your vehicle, so gap insurance may sound good, but it’s an expensive add-on that could cost several hundred dollars or more a year.

Shop around for the loan terms  

Remember the song lyrics, “My mama told me, you better shop around”? With auto loans, mama was right. Car dealers ‌have the best loan terms for auto financing—sometimes even 0% APR for a period—but don’t take the first deal you’re offered. That’s particularly true if you have less-than-sterling credit. Talk to multiple dealers and your local credit union or bank and online lenders, and compare offers. 

Consider paying cash

In the car industry, like elsewhere, cash is king. If you’re buying a car with cash, you don’t have to worry about loan terms and finding the best financing package. Of course, this isn’t an option for everyone, but if you can save up and pay cash for a car, it equals significant savings. 

Sign the loan, hit the road

Now that you’ve done your homework on auto loans, go out and start test driving. When you find your dream car, follow our tips for saving on auto financing. Then take your extra cash and use it toward your first road trip in your new ride.