Most people finance their car purchases, making the loan terms almost as important as the car price. A few percentage points in interest or an extended term can cost thousands. Here's how to get the best deal.
Understanding Auto Loan Basics
Key terms:
- Principal: The amount you borrow
- APR: Annual (includes some fees)
- Term: Length of loan (36, 48, 60, 72, 84 months)
- : Cash paid upfront (reduces principal)
How payments are calculated: Higher rate = Higher payment Longer term = Lower payment BUT more total interest
Pro Tip
The lowest monthly payment isn't always the best deal. A 72-month loan at 7% costs far more than a 48-month loan at 5%, even though the payment is lower.
Current Auto Loan Rates (2024 Context)
Rates vary by , term, and new vs. used:
| Credit Score | New Car Rate | Used Car Rate |
|---|---|---|
| 750+ | 5-7% | 6-8% |
| 700-749 | 7-9% | 8-11% |
| 650-699 | 9-12% | 11-15% |
| Below 650 | 12-18% | 15-22% |
Used car rates are typically 1-2% higher than new.
Where to Get an Auto Loan
Credit Unions (Often Best Rates)
- Member-owned, lower rates
- Pre-approval available
- More flexible underwriting
- Join before you need to borrow
Banks
- Convenient if you already bank there
- Relationship discounts possible
- Online banks often competitive
Dealer Financing
- Convenient one-stop shopping
- May have manufacturer incentives (0% APR deals)
- May mark up rates (shop around first)
- Finance office is a profit center
Online Lenders
- Easy comparison shopping
- Competitive rates
- Quick pre-approval
Keisha's dealer offered 8.9% on her auto loan. But she'd gotten pre-approved at her credit union for 6.2%. When she mentioned this, the dealer matched the rate—saving her $1,200 over the loan term.
The Pre-Approval Strategy
Why get pre-approved first:
- Know your rate before shopping
- Set your budget confidently
- Negotiating leverage with dealers
- Avoid surprises in finance office
How to do it:
- Check credit score first
- Apply to 2-3 lenders within 2 weeks (counts as single inquiry)
- Get pre-approval letter with rate and amount
- Shop with confidence
Do This
Apply for pre-approval within a 14-day window. Multiple auto loan inquiries in this period count as one inquiry for credit scoring purposes.
Choosing the Right Loan Term
| Term | Pros | Cons |
|---|---|---|
| 36 months | Least interest, build equity fast | Highest payment |
| 48 months | Good balance | Still manageable |
| 60 months | Most common, moderate payment | More interest |
| 72 months | Lower payment | Much more interest, higher rates |
| 84 months | Lowest payment | Highest cost, underwater risk |
The underwater problem: Longer loans mean your car depreciates faster than you pay off the loan. You can owe more than the car is worth for years.
Watch Out
Avoid 72+ month loans if possible. If you need that long to afford the payment, you're buying too much car.
Down Payment Strategy
Benefits of larger down payment:
- Lower monthly payment
- Less interest paid
- Less likely to be underwater
- May qualify for better rate
Recommended minimums:
- New car: 10-20% down
- Used car: 10% down minimum
When to put less down:
- 0% APR financing (keep cash invested)
- Strong emergency fund in place
- Very low interest rate
Gap Insurance
Gap insurance covers the difference if your car is totaled and you owe more than it's worth.
When you need it:
- Low or no down payment
- Long loan term (60+ months)
- Rapid depreciation vehicle
Where to buy:
- Your auto insurance company (usually cheapest)
- Credit union (reasonable)
- Dealer finance office (most expensive—avoid)
Dealer Financing Tactics
0% APR Offers
Often legitimate manufacturer incentives. The catch:
- May have to choose between 0% APR or cash rebate
- Do the math—rebate + your own financing may be cheaper
- Requires excellent credit to qualify
Rate Markup
Dealers can add 1-2% to your approved rate and keep the difference. Counter by having your own pre-approval.
"Buy Rate" vs. "Sell Rate"
The buy rate is what you qualify for. The sell rate is what dealer presents. Always negotiate.
Extended Terms to Lower Payment
They'll stretch to 84 months to hit your payment target. Resist—negotiate price instead.
When to Refinance Your Auto Loan
Consider refinancing if:
- Your credit score improved significantly
- Rates have dropped since you borrowed
- You got a high dealer rate
- You want to shorten your term
How much can you save? Example: $25,000 loan, 60 months
- Original: 9% = $519/month, $31,109 total
- Refinanced: 6% = $483/month, $28,999 total
- Savings: $2,110
Where to refinance:
- Credit unions
- Online lenders (LightStream, myAutoloan)
- Banks
Quick Win
If you financed at the dealer without shopping around, check refinance rates after 2-3 months of on-time payments. Many people save hundreds or thousands.
Paying Off Your Auto Loan Early
Benefits:
- Save on interest
- Free up cash flow
- Own the car outright
Check for:
- Prepayment penalties (rare but check)
- Simple vs. precomputed interest
Strategy: Round up payments or make one extra payment per year to pay off faster.
Common Auto Loan Mistakes
Avoid This
- Focusing only on payment - Dealers extend terms to hit any number
- Not shopping for financing - Leaving thousands on table
- 84-month loans - You'll be underwater for years
- Financing negative equity - Rolling old loan into new one
- Skipping pre-approval - Losing negotiating power
- Add-ons in finance office - Overpriced warranties and products
The Total Cost Perspective
When evaluating any auto loan, calculate total cost:
Example comparison:
| Scenario | Payment | Term | Total Paid |
|---|---|---|---|
| $300/mo × 84mo | $300 | 84 mo | $25,200 |
| $400/mo × 60mo | $400 | 60 mo | $24,000 |
| $500/mo × 48mo | $500 | 48 mo | $24,000 |
The $300 payment costs $1,200 more—and you're underwater for 4+ years.
Total cost matters more than monthly payment.