Everything You Need To Know About Car Loans

Written By Mary Beth Eastman
Last updated January 15, 2019

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January 10, 2019

Simple. Thrifty. Living.

Unless you have a significant amount of money saved, you will probably use financing when you purchase your next car. Car loans make it possible for you spread your payments over several years so you can afford to drive a new or used car home today.

Before you accept financing from a lender or dealership, though, you should know how to tell the difference between good and bad offers.

On average, 60-month car loans charge 4.21%. Your credit score, however, will partially determine whether you pay a higher or lower rate when you buy your new car.

Rates will differ from lender to lender, but you can expect to pay about:

  • 3.6% for a credit score that’s 720 or higher.
  • 5% for a credit score between 690 and 719.
  • 7% for a credit score between 660 and 689.

If you have a credit score lower than 660, then you may have a hard time getting a loan. Lenders willing to extend offers might charge 15% or higher.

Interest rates evolve with the economy, so make sure you research current rates so you can get a good deal for someone with your credit score. Researching online loan reviews is a good way to get started.

Pay as much money upfront as you can afford when financing a vehicle. A larger down payment makes you more appealing to dealers, which means you could qualify for a lower interest rate.

A larger down payment also means that you’ll spend less money on interest during the life of the loan. The less you borrow, the less interest you pay.

Dealerships may try to talk you into taking a larger loan by emphasizing that you don’t have to spend a lot of money today. If that happens, then the dealer is probably trying to earn more money by making you spend more on interest. Don’t take the bait.

A loan’s term refers to how long it will take you to repay the balance. If your loan’s term is 36, then you have 36 months to repay the money.

When possible, choose a short-term loan when buying your car. Lenders should give you a lower interest rate when you choose a shorter term. By selecting a 36-month loan instead of a 60-month loan, you should save about 0.2%. It’s not a huge difference, but you will spend less money by choosing the shorter loan.

Choosing a short-term loan also means that you will make interest payments fewer times. Instead of paying interest 60 times, you pay it 36 times.

The details of financing a car will change from month to month. Overall, though, the process stays pretty consistent. Know your credit score, do your research, and walk away from deals that don’t sound good enough to you.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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