Car loan FAQs

It's likely that the second most expensive purchase you'll make in your life, after a home, is a car.

While car is synonymous with freedom and a grand American tradition, it's important to have a realistic idea of what you can afford before you are swept away by that new car smell. When deciding how much you can spend on a car payment, keep in mind that experts recommend you budget no more than 10 to 15 percent of your take-home (or net) pay for transportation.

What can you afford?

Research the price of the car you want. There are many useful online sites for comparing prices and models. Some of these sites also offer buying tips and advice.

There are also websites to help you determine how much your down payment will be and offer guidance on the value of a trade-in vehicle. Don't forget to take into account how much auto insurance, monthly fuel costs, and regular maintenance will add up to each month.

Once you've determined how much you can afford, explore your financing options.

Auto loan basics

• Get a copy of your credit report before you apply for financing. You can request it online from Annual Credit Report (there is an $8 fee per credit bureau to obtain your actual score). Make sure the report is accurate; correct any errors that may be lowering your credit score. The higher your credit score, the lower your interest rate will be.
• If you do not have a credit history or have less than perfect credit, it may be possible for a coborrower to co-sign on the loan. If possible, get pre-approved for an auto loan before you go to the dealership. If you can bypass the credit department, you can focus on negotiating the price to fit your financing and potentially save money on the purchase.
• Compare financing options from the dealership and from your bank to see which has the better. deal.
• Loan terms can range anywhere from 12 to 72 months. The shorter your loan term, the higher the monthly payment. Keep in mind, the vehicle's year and mileage will factor into the maximum term allowed.
• The higher your credit score, the lower your interest rate will be. 
• Interest rates can be fixed or flexible. A fixed rate ensures your payment terms never change. A flexible rate can sometimes offer an initially lower interest rate, but the rate can rise unexpectedly, meaning you will pay more interest over the course of the loan. 

Before you sign

• Have you shopped around for the best loan terms you can get?
• Are there any pre-payment penalty charges if you pay off the loan early?
• How much are the application and/or processing fees?
• Is your interest rate fixed or flexible?

Auto purchases can be emotionally driven—like that convertible sports car on the showroom floor whispering sweet nothings in your ear—so protect your budget by exploring all of the costs involved before you start shopping. Gathering the facts ahead of time will help you make an informed decision and ensure you get the right car at the best possible price. 

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