How to get the best auto loan

Follow these steps to get the auto financing that is best for you:

• Figure out what you can afford in a car.  This includes the down payment and monthly loan payment.  The down payment is a lump sum you pay before you get the car.  It reduces the amount of loan you have to take out.  The monthly loan payment will be your principal and interest payments to your lender.  But you also have to include the following costs:

  • Gasoline to run your vehicle.  Use miles per gallon to estimate how much gas you will need.  The higher the average miles per gallon the care gets, the cheaper it will be to operate.

  • Maintenance.  You should plan on around $1,000/year for maintenance.  Maintenance includes rotating tires, changing the oil and other fluids, and ensuring all systems are in good working order.  It is NOT the same as car repairs.

  • Repairs.  When you car is not working properly, you may have to pay for repairs.  Car repairs can be relatively cheap to very expensive depending on what needs to be repaired.

  • Tires.  Depending on how much you drive, how you drive, and whether you keep your tires properly inflated, this could be an expense each year, every other year, or once every 5 years.

  • Tires

  • License, taxes, and registration.

  • Insurance

​Be sure you understand what you CAN afford to own and operate a vehicle before shopping for a loan or a car.

• Shop for your car loan before shopping for a car.  Check for the best interest rates and terms at large banks, community banks, online banks, and credit unions.  Talk to their customer service representatives to learn how much you might be eligible to borrow.  

• Know what’s on your credit report before the lenders do.  Before authorizing lenders to check your credit report, check your credit report first.  Errors on your credit report can mistakenly lead to loan denials so it is best to read your credit reports and dispute inaccurate information before applying for a car loan.  Understand that an auto lender will likely look at one of your credit scores.  They will use your credit scores to determine whether you can get a loan and how much the loan will cost you.  Your credit scores will likely be used to determine the interest you will pay.

• Shop for an auto loan with the best interest rate and term:  While some auto lenders may begin a conversation with a customer with, “So, how much do you want to pay each month for your car loan?” what you really want to consider is how to pay the least.  This means shopping for the finance charges or APR.  Finance charges are the cost of a loan expressed in a dollar amount. APR is annual percentage rate.  It is the cost of the loan expressed as an annual percentage of the loan.  Both finance charges and APRs includes the interest rate and any additional charges or fees that anyone getting this loan would pay.  It does not include fees charged for not following the terms of the loan like late payment fees.

• Comparison shop:  Talk with several lenders before you make your final decision of which lender to use.  And let those lenders know that you are shopping around; if they know that you are checking they may be more inclined to offer you their best rates.

• If you decide to apply for more than one loan, do so in a two-week window:  Every time you make an official application to borrow money you are authorizing the creditor to check your credit report.  This is called a “hard pull” and it will result in a slight drop in your credit score.  However, if you make all your applications in one two-week window, the credit bureaus will know that you are comparison-shopping and those multiple credit checks will only count as one.

Read, read, read:  Before signing, ask to bring the contract home where you can read it carefully and prepare any questions that you might have.  You want to make sure you both understand and agree with all the components of the contract.