val
Val GuiFounder and COO of Instamotor.com View bio
todd
Todd NelsonBusiness Development Officer at LightStream View bio

This guide was written by

Claire Swinarski

Thinking about buying a new car, but don’t have enough money saved up for the one you want? You’ve got plenty of company. Whether getting a new Mercedes or a used Honda Accord, many prospective car buyers need a little financial help to make the purchase. With the right type of auto loan and payment plan, you can buy your car without breaking the bank. But before visiting your local dealership, read this guide for expert advice on how to get the best deal.

Car Loan Resources

Auto Loan Calculator

Use MoneyGeek’s car payment calculator to estimate your monthly payments for a new or used car loan.

Getting a Car: Lease vs. Loan

Should you lease a car or get a loan to purchase one? Many people choose to buy a car, but for some, leasing may be a better option. This guide reviews the pros and cons of leasing and getting a car loan and offers tools and expert advice to help you decide which choice is best for you.

Getting a Car Loan With Bad Credit

If you have poor credit, getting a car loan can be challenging. This guide walks you through the process and provides tips on how to get the best possible plan and interest rate.

Auto Loans and Transportation Options for Seniors

If you’re an older driver, get information on the different car financing options available to you and tips on how to choose the one that fits your needs and budget.
This guide also includes information on being a safe driver, alternative transportation options for when driving isn’t ideal and driving safety recommendations for caregivers.

Refinancing an Auto Loan

Refinancing can lower your interest rate, which may help you save money or even pay off your car loan quicker. Learn more about how to refinance your auto loan.

Types of Auto Loans

For many people, buying a car requires taking out a loan. There are a few different types of auto loans, and depending on your financial situation, one may be a better choice than others. Get a better understanding of common types of auto loans before you start applying for one:

Special Loans

Where to Shop for Auto Loans

There are three main places where you can get an auto loan: the dealership, the bank or a credit union. Take the time to figure out which is best for you in the long run.

The car dealership

The dealership that sold you your car will typically offer a payment plan.

Benefit
  • Dealers often offer “low or zero-percent financing,” meaning a very low or no interest rate. It’s also easy one-stop shopping because you can choose the car you want to buy and handle financing all at once.

Drawback
  • You’ll need to have an excellent credit score to be approved for zero-percent financing. Also, low financing will usually mean much higher month-to-month payments.

Banks

Banks are established lenders offering direct loans you can use to pay the dealership for the vehicle you want to buy.

Benefit
  • Banks tend to be more reliable than other lenders, and you can do research to find one with a good reputation. Also, if you already have a relationship with your bank, they may be more willing to work with you if you fall behind on payments.

Drawback
  • Not all banks will negotiate on their offer. This may mean you’ll get a higher interest rates than you might with an auto dealership.

Credit unions

Credit unions are non-profit organizations owned by members and governed by a board of directors instead of a president.

Benefit
  • Credit unions offer competitively low rates, and you’ll have a more personalized experience than if you were at a large bank. Additionally, credit unions are sometimes more willing to work with borrowers who have some bumps in their credit history if they’re credit union members.

Drawback
  • You have to meet certain criteria to be eligible to join a credit union, such as belonging to a certain community, school or church or working for a particular employer.

How Car Loans Work

Direct lendingval
  • 1Apply for an auto loan
  • 2Get approved
  • 3Visit the dealership and choose the car you want
  • 4Sign the dealership contract and take your car home
  • 5Make your loan payments on time
Dealership financingval
  • Dealer collects needed information
  • Your info goes to prospective lenders
  • Lender(s) approves the loan and agrees to provide credit
  • Lender gives dealer a buy rate
  • Dealer gives you a contract rate
  • You negotiate (optional, but recommended)
  • You get your car

Steps to Getting a Car Loan

So you know you need a car loan, but how do you go about getting one? Here are the steps to getting the car loan that’s right for you.

1

Decide if you want a new or used car

Deciding whether you want a new or used car is essential. This can depend on different factors, such as your finances, family life and amount of travel. New cars will last longer, but will rapidly decrease in value. “If you have excellent credit, you can generally get slightly better rates on a brand new car (1 to 2 percent), but people forget that new cars depreciate 8 to 12 percent the second they leave the lot,” said Val Gui, founder and COO of Instamotor.com. “That means, depending on your down payment, the loan you have on the new car will likely be larger than the value of the car itself.” However, you can often get better interest rates on a new car loan because if you default on the loan, the lender can resell the vehicle for a high value. A loan for a used car is usually more affordable, but the car may require more maintenance, which can add up in the long run.

2

Figure out how much you can spend on a car

Take a long, hard look at your finances and decide how much you can spend on your vehicle. How much can you put toward a down payment? After you’ve determined that number, consider recurring expenses that come with car ownership such as gas, car insurance and regular maintenance. Finally, what about the loan itself? The longer the term of the loan, the less you’ll have to pay each month. But the downside is you’ll end up paying more interest, eventually leading you to pay much more than the car is actually worth. Consider all these things when deciding your price range. “Smart shoppers know it’s not just about the monthly payment, it’s about the total of those monthly payments and all the interest expense during a loan,” said Todd Nelson, business development officer at LightStream, a division of SunTrust Bank.

3

Check your credit report

Your credit score is going to have a huge impact on the type of loan you’re approved for, so check your credit report before completing the application. The better your credit score, the better your loan terms.

4

Complete a loan application

For a loan application, you’ll be asked to provide some or all of the following information:

  • Basic info (name, address, birthdate)
  • Social Security number
  • The name of your current employer and the number of years you’ve been employed
  • Your income
  • Bank account numbers
  • Whether you rent or own your home
  • Typical monthly expenses
  • Credit report

Keep in mind that every time you apply for a loan, it shows up on your credit report and hurts your credit score. However, if you apply for more than one loan within a 14-day time period, it will only count as a single inquiry.

5

Get pre-approved

The amount for which you’re pre-approved will give you an idea of your maximum budget. “Having the loan completed in advance gives the consumer a stronger negotiating position for the purchase and saves time at the dealership,” Nelson said. If you’re getting a loan at the dealership, inquire ahead of time if you can be pre-approved for a loan. Different dealerships will have different practices, but some will allow pre-approval before you’ve selected a specific vehicle.

6

Find a co-signer, if needed

Sometimes lenders will only approve you for a car loan if you have a co-signer. If you have a low credit score, no credit at all or don’t have high enough income to cover monthly payments, the lender may require you to have a co-signer on the loan. A co-signer is someone with good credit who agrees to take full responsibility of the loan if you default. The payment appears on both your credit reports, so make sure your co-signer completely understands the terms.

7

Choose a vehicle

Select a car that meets your needs and budget. Negotiate the best deal possible on the vehicle and your credit rate, then determine the amount you’ll need to pay each month.

Military Car Loans

For active servicemembers and veterans, getting an auto loan isn’t that different from a civilian getting a loan. There are, however, a few important things all military personnel should be aware of before they start shopping around, such as:

Beware of scams and predatory lenders

Most car dealerships want take care of the women and men who serve our country, but there are some lemons out there. Like all other car buyers, military servicemembers should research cars and dealerships carefully before purchasing and signing anything. Servicemembers, however, can sometimes be more targeted for scams and predatory lenders because unscrupulous salespeople want to take advantage of the fact that servicememebers have a good and steady stream of income. And if the potential buyer has been stationed overseas, paychecks have probably accumulated and he or she now has lots of cash to spend. Read reviews of dealerships and check ratings at the Better Business Bureau. In addition to complaint information, customer reviews and details on any government actions, BBB provides an A+ to F grade for accredited businesses, including car dealerships. You can also research car prices on Kelley Blue Book or Edmunds.com. If you need more information on car buying for servicemembers or want to file a complaint, the Consumer Financial Protection Bureau now has an Office of Servicemember Affairs for such matters.

Many dealerships offer military discounts

As a sign of appreciation, many car dealerships offer special discounts to active duty military, veterans, retirees and spouses of retirees. Honda, for example, gives eligible military car buyers $500 for a new car when they finance or lease though Honda Financial Services. Acura offers $750 to those financing or leasing through Acura Financial Services. Be sure to ask dealerships if they have such incentives and find out what you need to do to take advantage of them (usually providing proof of military status is all you need, but some dealerships may have additional requirements).

Know your rights and use the resources available to you

The chance of predatory lenders, overseas deployment or a change of duty stations put servicemembers in a unique situation when it comes to car buying. Because of this, it’s important to know your rights to avoid becoming a victim of scams, as well as know where to go for support when you need it. Whether you’re just starting to research for a big car purchase or are already making payments, there are several resources available to help you through the process or tackle any issue. For example, what if you’re already leasing a car and find out you’ll be deployed overseas; what do you do about your monthly payments? According to the Consumer Financial Protection Bureau, you may be able to terminate your lease without any penalties.

Car Buying Resources for Military Servicemembers and Veterans

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Better Business Bureau

BBB is a nonprofit organization that serves to foster better relationships between businesses and consumers. You can visit the site to find out whether a car dealership is accredited, what grade it received from BBB (on an A+ to F scale), read customer complaints and reviews, get reports on government actions taken against a dealership and file a complaint.

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Office of Servicemember Affairs

Operated by the CFPB, the Office of Servicemember Affairs addresses challenges specific to servicemembers, veterans and their families. You can find resources and information on car buying and other big purchases.

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Servicemembers Civil Relief Act (SCRA)

Find out what your rights are when it comes to leasing or financing a car. SCRA was created to provide financial and legal protection to all individuals in military service. It was originally signed into law in 2003, and has been updated multiple times since.

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Veterans Affairs – Automobile Allowance

Eligible servicemembers and veterans with a service-connected disability can apply for an automobile grant via the U.S. Department of Veterans Affairs. This one-time grant of no more than $20,235.20 can be used towards the purchase of a new car. If awarded, the money goes directly to the seller.

Factors That Affect Your Auto Loan Rate

Lenders look at several different details to determine the size and terms of the loan they’re willing to give you. These factors often include:

Income
The higher your income, the easier time you’ll have making your monthly payments. This means you’re less of a risk to the lender.
Debt
Are you in debt to other lenders? Banks, credit unions or the dealership may be wary of giving a large loan to someone who already owes a lot of money or has a history of not making payments on time.
Credit history and score
“Several years of credit history with a variety of account types such as major credit cards, installment debt and mortgage debt if applicable” are among things lenders look at, according to Nelson. “A good payment history with few, if any, issues repaying debt obligations is important. Also, an ability to save. This is typically evidenced by liquid assets, cash down payments on real estate and retirement savings.” If you have a low credit score, you’re considered a risky investment — and will likely receive a higher interest rate so the lender can cover the possibility of you defaulting.
Age of your vehicle
Newer cars will generally have lower rates and older, used cars tend to come with shorter terms.
Size of your down payment
If you have a large down payment and not a lot to pay off, the lender sees that as a safer bet and will likely offer you a lower rate. But if you’re relying heavily on just your car payments, you’ll likely have a higher rate.
Type of rate
A fixed rate means your interest rate is set. Flexible rates fluctuate with the market.

How to Avoid Common Mistakes

At the end of the day, lenders are looking out for themselves, so you need to look out for yourself. Avoid these common errors to make the best possible financial decisions and receive the most value for your money.

Common Mistake Explanation How to Avoid it
Not knowing your credit score If you don’t know your credit score, you may end up accepting a loan and terms that aren’t the best. Pull your credit score from a reputable site so you know your credit value. Even having slightly better credit than you thought could score you major savings in terms of interest.
Getting add-ons Things like paint sealant can be bought separately, but a dealership will often try to tack those products on to your financing plan, which means you’ll also pay interest on them. Say no to extra additional items, even if it sounds like a good deal at the time. You can always buy those things later if you need to. It will lower your overall financing if you aren’t paying interest on those items.
Going by rate alone Of course, you want a low rate, but don’t forget down payment and loan terms are equally as important. Come to the dealership with your overall budget in mind, including monthly payments and down payment, so you don’t end up paying significantly higher interest due to a longer-term loan.
Not attempting to bargain “Many people don’t know that rates on loans are often times negotiable, both at the banks or credit unions and at dealerships,” Gui said. Negotiating your rate could save you money in the long run. Research the value of the car and come prepared with your credit history so you’re knowledgeable and ready to fight for a better rate. Don’t be afraid to negotiate the price of the car and your financing plan.
What to Do If You Can No Longer Afford Payments

If you can’t afford your auto payments anymore, you’re probably panicking. Maybe you were laid off or the stock market has taken a dive. Here are a few routes you can pursue to try and settle the matter.

  • Contact family and friends

    Before you panic, contact family and friends to see if someone can lend you money to get you through the month. Although it can be awkward to ask, sometimes a short interest-free loan from a family member or friend is all you need to get back on your feet.

  • Reach out to your lender
    to ask about refinancing

    Don’t avoid your lender. Lenders will typically be willing to work with clients to keep them around, and the worst thing you can do is to simply stop paying with no communication. Depending on your situation, lenders sometimes allow your payment to be deferred 30 days. You could also ask about refinancing, which would involve spreading the payments out over a longer amount of time and eventually paying a higher interest rate. Although not ideal, it may help get you out of a tough situation for the time being. To learn more about refinancing, check out the following guide:

  • Sell your car

    Ask the lender how much you still owe on the car, then do independent research to learn its true market value. If the car is worth more than you owe, it’s possible to sell the car and use the profits to pay off the loan.

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  • Find someone to assume the loan

    You may also find someone who’s willing to assume your loan if it has a relatively low interest rate. Interested buyers must have good credit, and lenders aren’t always willing to let you give your loan away, so consult with them first.

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  • Offer voluntary repossession

    Repossession of a car depends on factors such as the reason for missed payments, the policy of the lender and your payment history. If it’s impossible for you to make the payments, the lender will repossess your car and sell it at an auction. You’ll then be responsible for making up the difference between the sale and the value you still have left to pay. That means you’ll be paying for a car you don’t even own—and you probably don’t have money for a new car, either. Having your vehicle repossessed will also severely damage your credit score, making it extremely difficult to get anything but a subprime loan for a long time. Voluntary repossession, which occurs when you hand in your keys and say that there’s no way you can possibly make any type of payments, will still wreak havoc on your credit score. But although you’ll still most likely owe the lender money, you won’t have to pay for a tow truck as well.

  • The last resort: File for bankruptcy

    If you can’t make any type of payment, even making up the difference between the sale of your car and the value you owe the lender, your only option may be to file for bankruptcy. Meet with an experienced bankruptcy attorney to go over your options if that’s the case. Keep in mind this will leave a black mark on your credit score for the next 10 years.

  • The last resort: File for bankruptcy

Know Your Rights

There are a lot of laws regarding auto loans and understanding them can help you negotiate a better deal. Below are the laws you should be familiar with:

Equal Credit Opportunity Act

A law protecting you against unjust denial of a loan, including an auto loan. Lenders can’t discriminate against you because of your gender, race, marital status, religion or age. If a lender denies you the loan, you have the right to ask why you’re being denied and the creditor has to furnish that information.

Risk-Based Pricing Rule

A notice disclosing that the lender has used your credit score in help price your loan. If a lender relied on your credit report to offer you less favorable terms than other borrowers, the lender is required to provide you with a Credit Score Disclosure Notice. The notice includes information about how to get your free annual credit report, your credit score, the score range and negative factors affecting the score.

Fair Credit Reporting Act

A law that gives you the right to one free credit score check a year from each of the major three nationwide consumer reporting agencies. It also provides you with steps to take if you think your credit report is inaccurate or incomplete. This also requires the lender to disclose if a low credit score was the reason a borrower was given a high interest rate or denied a loan entirely.

Credit Practices Rule

A rule that says co-signers must understand they’re required to pay the car payment if the original borrower is unable to.

Truth In Lending Act

A law that requires the lender give you all important information before you sign the agreement. This information includes the price of monthly payments, when they’re due, the length of the agreement and consequences for delayed payment.

Consumer Leasing Act

A law that requires any company that leases cars to provide certain information to you upon signing. The company must let you know how much is due and when, what happens if you default or pay late, the mileage requirement and the penalty for excessive mileage.

Terms You Should Know

Amount Financed

The total dollar amount of credit given to you by a lender.

Annual Percentage Rate (APR)

The true yearly cost of your loan, which may include interest, insurance and origination fees, aka points. It’s affected by things like your credit history, market conditions and the type of car you’re purchasing. This is what you attempt to negotiate when you’re shopping for financing – you want the lowest possible APR.

Assignee

A company (like a bank or credit union) that buys an auto loan contract from the dealer.

Credit Report

A detailed report on your credit history. It will include a list of any late payments, whether you’ve ever filed for bankruptcy or defaulted on a loan and whether you’ve had any legal issues over money. Lenders will look at this to determine your APR.

Credit Score

The score on your credit report. This represents the risk you present. The better your credit history and the higher your score, the better chance you have at a low APR.

Down Payment

The amount of money you’re able to put down on the vehicle right away. This amount will reduce how much you have to finance, meaning the higher a down payment you can make, the less you’ll have to pay in monthly installments.

Fixed Rate Financing

An interest rate that stays the same over the entire contract.

Flexible Rate Financing

A type of adjustable financing that is the opposite of fixed rate financing. With this type of financing, the interest rate fluctuates with the market.

Guaranteed Auto Protection (GAP)

Optional protection if your vehicle is stolen or destroyed before you’ve completed paying off the loan. This protection pays the difference between the amount your insurance company would provide and the amount you still owe the lender.

Lease

An agreement in which you rent a car monthly instead of taking out a loan to purchase it. Towards the end of your lease, which is often about three years, you have the chance to buy the vehicle.

Long-Term Loans

Loans that are longer in length, usually six or seven years. Monthly payments will be lower, but borrowers will end up paying much more due to interest, and it may cause them to have negative equity.

Monthly Payment

The payment you make towards your car loan each month. Your contract will specify what day this is to be paid by each month.

Negative Equity

Also known as being “upside down.” Negative equity occurs when an amount owed on a vehicle is above its market value due to interest owed. Your negative equity total is the difference between the true market value of the car and how much you’ll end up paying for it.

Short-Term Loans

Loans that are shorter in length, usually one to two years. These payments tend to be higher, but the borrower will pay less interest in the long run.

True Market Value

The price of a car, dictated by market conditions in your area.

Repossession

When your lender takes your vehicle back because of missed payments. Depending on the terms of your contract, they can do this without going to court or giving you advance notice. In some states, lenders are required to let the borrower know what happened to their car upon repossession, but in others, borrowers are kept completely in the dark.

Total of Payments

Total amount you end up paying for your vehicle.

Wholesale Rate

Rate at which an assignee buys the contract from the auto dealer.