Car Buyer Labs

Car Buying Advice, Tips, and Reviews

Car keys are being handed over after completing the loan paperwork.

Finding a Good Car Loan

One of the most important parts of buying a new car is finding good financing terms. However, finding good financing can be even more difficult than finding a good car. The math behind loans can be complicated, and shopping between lenders can be difficult. But if you take your time and pay attention to the details, you should be able to find financing terms that meet your needs. If you find a trustworthy car dealership, then the experts in their financial department should be able to get you a good deal on a car loan in 5 minutes or less.

If you are wondering what are good rates and terms for a car loan, here are some tips from us. First, there are no simple answers to these questions. Car loan rates depend on a large number of factors, not only your credit rating but also factors such as the type of car and the length of the loan. Furthermore, different lenders may offer other benefits to consider as well as interest rates. However, to give a starting ballpark figure, you can consider an interest rate of below 5% to be a good deal. Keep reading for a closer examination of what you should look for in a car loan.

An Introduction to Car Loans

The total cost of a car loan has two main elements to consider. These are the interest rate and the loan length. While everyone understands that a lower interest rate will mean spending less money, it may not be as clear that loan length can be just as important when calculating how much extra financing will cost you. A lower interest rate means that you will pay less for your loan every year. A longer loan means that you will be paying interest for a longer period of time. Ideally, you should be looking for both the lowest interest rate and the shortest loan period possible without exceeding a manageable monthly payment.

While interest rate and loan length may determine the total cost of the loan, the number you will see most often is the monthly payment. While a higher interest rate will produce a higher monthly payment, a longer loan term will result in a lower monthly payment even though it increases the total cost of the loan. Even though you are paying more money in the end, because it is spread over more months it will cost less per month. This is why it is important to aim for the shortest possible loan length.

Let us walk through some examples to see how these factors play out. If you were to take out a $20,000 loan for 48 months with a 4% interest rate, you would pay $452 a month for a total of $21,676. If you took the same loan but with a 5% interest rate, you would pay $461 a month for a total of $22,108. Not only does the higher interest rate mean you would have to pay $9 more a month, the total loan cost would be $432 more. However, if you instead took out a $20,000 loan for 60 months with a 4% interest rate, you would only pay $368 per month, but the total loan would cost you $22,100.

As can be seen from these examples, interest rates and loan lengths play equally important roles in how much you will ultimately pay for your car loan. That is why you must consider all factors when determining what the best loan for your needs is rather than simply chasing the lowest interest rate or monthly payment. While this may seem like a complicated task, remember that the financial team at your local dealership deals with these details all day and are there to lend you their expertise when you are searching for a loan.

Three sets of hands are looking at interest rate graphics on a tablet.

Interest Rates

Auto loan interest rates are a complicated matter determined by complex equations. In addition to your personal credit history, they take into account market trends, the nature of the vehicle that you are buying, and the terms of the loan itself. Because interest rates are so specific and fluctuate over time, it is nearly impossible to tell you what a good interest rate is without knowing all of the details of the sale. However, there is some general interest rate information that can help you in finding the best deal possible.

Your credit score is the single largest factor in auto loan interest rates that you have direct control over. If you are unfamiliar with how your credit score works, then there are lots of resources out there that will explain the subject in depth. The basic idea is that if you have a history of borrowing money and paying it back on time, then lenders will consider you a safe investment and will be more willing to lend you money at lower rates. The higher your credit score, the lower the interest rate you can expect, but you should be able to find acceptable financing as long as your score is in at least the 600s.

Interest rates will also depend heavily on the type of vehicle and loan. Generally speaking, new vehicles are eligible for lower interest rates than used vehicles because a new car is a more valuable and more consistent collateral. While the difference is not usually large and is commonly around 0.25%, it may still be enough to convince you to upgrade from a year old Certified Pre-Owned car to the latest model. If you are planning to get quotes from lenders before buying, try to include the models that you are looking at to get the most accurate information.

Another factor to keep in mind is that almost no one actually receives the best-advertised interest rates. So even if you see lenders advertising interest rates of under 3%, that does not mean a hypothetical 4.5% interest rate loan that you are being offered is a bad deal. In fact, a 4.5% interest rate is noticeably lower than the average auto loan interest rate for buyers with excellent credit scores. This difference between ideal and actual interest rates does complicate knowing what is a good offer, and is part of the reason why you should consult with experts when setting up car financing.

A car salesman is walking a couple through a 5-minute car loan at a dealership.

Get the Assistance You Need

While it is possible to shop for car loans yourself, and the internet has made it easier than ever before, the best route is still to get assistance from your dealership finance team. These professionals have considerable expertise in the area and regularly work with dozens of different lenders to find the best financing for their customers’ needs. Not only does this allow you to find a good interest rate more quickly, a dealership finance department’s familiarity with the market can allow them to find deals that you were not aware of.

In order to have a baseline for comparison, it can still be a good idea to get a quote or two for yourself before heading to the dealership. If you are unfamiliar with the process, it will likely take you far longer to navigate on your own than it would if you find assistance. Consulting with a skilled dealership finance team can save you considerable time and money when setting up financing. Financing a new car does not have to be complex if you get the assistance that you need.