How To Get a Car Loan
Once you’re in the market to buy a new car, applying for a loan can be a complicated process, depending on where you look. To acquire a car loan, follow these general steps:
Determine your budget. Before you shop for a loan, you must first determine your overall budget for purchasing a vehicle, making payments and handling expenses such as maintenance, fuel or insurance. Also, consider your current and future financial situation, which can impact your ability to handle payments and expenses.
Check your credit score. Understanding your credit score can help you determine the type of loan you’ll have access to and your potential interest rate. Checking your credit score through free credit score monitoring websites requires a soft credit check, which has no impact on your score.
Shop around for loans. Based on your budget and credit score, you should shop around for the best loan that meets your needs and payment capabilities. You can find auto loans from various sources, including dealerships, banks, credit unions and online lenders.
Get preapproved. Preapproval can give you negotiating power when applying for a loan. It also allows you to set a reasonable budget before shopping for a vehicle.
Select your desired vehicle. Once you have a solid idea of your budget, you can begin your search for a vehicle. It’s important to try different dealerships to ensure you find the best prices, rates and loan terms before making your decision.
Finalize the auto loan. Once you select the vehicle and a loan, make sure that you check the details to ensure it matches your agreement. Also, ensure that you have filled out and received copies of all the required documents before you drive the vehicle off the lot.
What Is a Good Interest Rate On a Car Loan?
Car loan interest rates can be affected by a myriad of factors, including your down payment, credit score, vehicle type and loan duration. However, most borrowers try to find rates within or below the national average.
As of July 2023, the national average for a car loan interest rate is 6.58% for a new vehicle and 11.17% for a used vehicle. However, any interest rate below 6% is preferable. The best rates are typically reserved for highly qualified applicants.
Car loan interest rates are known to fluctuate on a consistent basis. For example, the average auto rate in June 2023 was 7.14%, which is a 0.56% decrease from July’s average. As such, it’s good practice to check auto interest rates daily to get the best estimate for your monthly payments.
How To Lower Your Car Payment
Whether you’re looking to refinance your loan or lower potential monthly payments before choosing a loan, there are many viable options to lower your monthly car payment, including:
Select a longer loan term. Longer loan terms usually come with smaller monthly payments but more interest over the life of your loan. Conversely, short-term loans typically have larger monthly payments; however, you’ll pay less interest overall.
Make a larger down payment. Whether you accumulate more funds or choose to trade in your previous vehicle, a larger down payment can reduce the size of your loan and your monthly expenses. A down payment of at least 20% is ideal for new cars. For used cars, a down payment of around 10% is recommended.
Refinance your current loan. Refinancing a car involves taking out a new loan with lower payments and a lower interest rate to pay off your existing loan. As a result, the monthly payments on your loan could decrease significantly.
Make additional or lump-sum payments. Although it will require more money upfront, paying a larger portion of your loan can reduce your monthly payments in the long run.
Lease your car. Car leases typically have lower monthly payments because you aren’t paying to own the vehicle. In the first quarter of 2023, the average car payment for a new, leased vehicle was $586.
Comparatively, the car payment for a new, purchased vehicle was $725. When renting a used car, monthly payments can decrease further. The average payment for a used, leased car sat at $505 in 2023.
