If you want to purchase a new or used car, an auto loan (commonly called a “car loan”) gives you a way to pay for it over time. A lender will agree to finance the purchase of the vehicle, and you will pay the loan back over a set term in installments.
Your payments will include a portion of the amount you borrow plus the annual percentage rate (APR), which is the interest you are charged for borrowing, plus any fees.
What types of car loans are available?
- New car loans. You have the option of getting pre-approval for your loan before you find a car, giving you bargaining power when you get to the dealership. You can also take up financing from the dealer or the auto manufacturer.
- Used car loans. If you are planning on buying a used car, you may need to find the car first if you want a loan from a bank or credit union. Provide the lender with the make, model and VIN number of the car when you apply. You also have the option of dealership financing if you aren’t buying in a private sale.
- Refinancing car loans. If you’re already paying off a car loan you may be able to save by refinancing to a loan with a lower rate. Compare your options and see if you can save.
- Lease buyout. If you want to buy the car you’re currently leasing, you can take out a lease buyout loan to buy your car before the end of your lease. It could help you save you money depending on how much your car has dropped in value and if there are any purchasing fees.
- Rent-to-own. This type of financing can be helpful for people with bad credit. You’ll pay a monthly toward owing your car, on top of a rental fee.
Here’s how to compare your options
Getting the right car loan means knowing what features to look for:
- What’s the annual percentage rate (APR)? This rate includes the interest you will be charged along with any fees, giving you the true cost of the loan.
- How long will you have to pay back the loan? While longer loan terms might result in lower monthly payments, you’ll likely pay more over time. Find out the total interest you’ll pay with the loan term and if you can save with a shorter term – and if you can afford the payments. As a car is a depreciating asset, longer payments also increase the likelihood of you paying more than the vehicle’s value at the end of the term.
- Can you make a down payment? You can save a significant amount on your loan if you make a down payment on your vehicle. If you are pre-approved for a loan with a lender and make a down payment, keep in mind this will be taken out of the loan amount.
Seven steps to apply for a car loan
- Check your credit. Knowing your credit score will help give you an idea of what kinds of lenders you’ll be dealing with. If you’re under 620 you’re going to have different options than someone with a score of 720.
- Go over your finances. Ask yourself how much you can really afford to take out. Don’t forget to consider car ownership costs like fuel, maintenance and repairs, taxes and insurance premiums.
- Compare lenders. Do some research to find the best rates and terms that fit your financial situation.
- Get pre-approved. This usually involves filling out a quick application with your basic personal information and may involve a soft credit check that doesn’t affect your credit score.
- Pick your car. Sometimes you’ll get to do this before you get pre-approved, but typically lenders will want to go over your finances first before you decide on a vehicle.
- Sign the paperwork. Make sure you read and understand the fine print to avoid any nasty surprises in the future.
- Start making payments. You can avoid late fees by setting up autopay to avoid late fees
Three different methods to apply
- Online. Before you visit the dealership you can apply for pre-approval online with a bank, credit union or other lender. This way, you have a price in mind when you’re negotiating with the car dealer. Compare your options so you can get the most competitive option that you’re eligible for.
- At the dealership. Financing through dealers or auto manufacturers is another possibility. Keep in mind that 0% finance deals and similar offers that sound too good to be true, usually are just that. For example, if you save money on an interest-free finance deal, you may not get as good a deal on the vehicle price.
- In-person or over the phone. You can also apply for bank and credit union loans in-branch or over the phone. If you’re opting for dealership financing, the application will usually be handled in-person when you purchase your car.
What cars can you finance with a car loan?
With the number of lenders available in the market, you’ll have options no matter what kind of car you want to buy:
- New cars. When you’re looking to purchase a new car you’ll have a wide range of auto loan options to choose from. New car loans tend to come with the most competitive rates, depending on how good your credit is, and other eligibility criteria. You can apply for the loan before you buy the car so you know how much you have to spend at the dealership.
- Used cars. You have various financing options whether you’re buying a used car from a dealership or through a private sale. You have the option of applying for the loan before you buy the car, or finding the car and sending the car’s make, model, VIN number and other details when you’re applying for the loan.
- Luxury cars. Loans of larger amounts are also available for luxury cars. If you’re planning to import a vehicle, you may be able to apply for a loan to cover import costs and taxes on top of the cost of the car itself.
How much do car loans cost?
Cost will always be the key consideration for an auto loan. When comparing loans and the associated costs, it can help to use a car loan calculator to see what your monthly payments will be. Here are some things to keep in mind:
- Interest rate vs APR. It’s important to check the interest rate you will be charged as well as the APR. The interest rate is the percentage of the principal that you’re charged for borrowing, while the APR represents all interest and fees expressed as a percentage, and hence gives you a better basis for comparing loan costs.
- Rebates. Anyone buying a new car will hear about rebates from dealerships. The three main types of rebates are cash rebates, low interest dealership financing and special leases. Government rebates, such as low emission rebates, are also on offer. These rebates really only need to be taken into consideration when you’re considering taking on financing from the dealer.
- Loan term. A loan with longer terms will make your monthly payments lower, but you will pay more interest over the course of your loan. Be sure to consider the total cost as well.