Auto Loan FAQs

The world of auto loans can be a confusing place. Here are some frequently asked questions and answers to help you navigate your way toward the perfect loan for you.

What are the key elements of an auto loan?

Many variables go into calculating car loans, but some of the most important ones include:

Cost of the car.
Interest rate.
Length of the car loan.
Credit score.
Down payment.
New vs. used cars.

What will I need for a car loan?

In addition to general personal information, checking your credit and verifying your income, the lender is generally going to want information about the car you are purchasing.

How do I find a good rate on my auto loan?

Shop around. This is big business: the auto loan industry has just under $2 billion in outstanding loans. There are many lenders, including auto insurance companies, credit unions, banks, and dealers, all competing for your account.

Determine your budget, how much you want to spend, and how much you can afford to spend every month on the loan. Car loan calculators can help you understand various monthly payment scenarios.

Where and when can I find the best deal on a new car?

Keep your eye open for dealership advertising and compare offers. Also, certain times of year can be favorable to a good deal. For instance, shopping at the end of a month or quarter can sometimes make a difference because of a dealership's sales goals. A salesman might be willing to provide a better offer than usual in order to get in a sale before month-end.

What's an APR?

APR stands for annual percentage rate. This is the yearly rate of interest that you will pay on the loan. Typically, auto loan APRs are fixed rates, meaning your APR will remain the same through the lifetime of the loan.

Are “0% financing" and “no money down" offers too good to be true?

Not necessarily—but read the fine print.

While zero percent financing is a real thing, you should note that:

0% financing is almost impossible to get without excellent credit.
The vehicle price may be inflated to make up for the loss in interest.
Other incentives and offers do not typically apply.

Additionally, even if the dealership does not require any money down on the car itself, there will still be fees due up front to the state, as well as taxes and dealership fees. You should also check whether lack of a down payment impacts the interest rate or other terms of the loan.

How much can I afford for an auto loan?

This is a difficult question for many people to answer because so few of us keep a monthly or yearly budget of expenses. The easiest way to know how much you can afford is if you already have car payments and those payments work for you. In that case, you have a baseline for future payments.

If not, then the biggest question to answer is how much of your monthly income you are willing to give up for car payments. A general guide is 20% of income. However, a conservative spender might base their calculation only on the extra income they may have every month, while someone more aggressive might focus on what current expenses can be cut in order to make room for car payments.

Don't forget to think ahead. If you are planning on a big purchase or expense within the next few years, like buying a house or having a baby, you may not want to spend too much on a new car. Higher car payments today will mean you will have less to spend tomorrow.

What is “being upside down" on a loan?

Being upside down on a loan is when you owe more money to the lender than the car is worth.

Should I get an auto loan through a dealer or a bank?

There is no right answer here. You should get a loan wherever you find the best deal that suits your needs and comfort level. Some people prefer to shop online for a new auto loan. Others want to sit in front of a person—at a dealership, bank, or credit union—and negotiate. No matter where you prefer to get a loan, you should compare prices with different lenders, even if they're all local banks or all online lenders.

Can I get an auto loan if I don't have good credit?

This depends on how bad your credit really is. Lenders often charge more but still offer loans to people with bad credit—to a certain point.

I have great credit. How do I get the best possible deal?

Shop around. Lenders want your business, and the best offers are reserved for people with the best credit.

What auto loan mistakes should I avoid?

A common mistake with car loans is to focus on the monthly cost of the car payment and lose sight of the overall total cost of the loan. Make sure you know the total you are willing to pay for the car before you focus on monthly rates. That will prevent you from spending more than you want, or worse, more than the car is worth.