Auto Loan Tips: How to Finance Your Next Car the Smart Way

For many Americans, a car is a necessary means of transportation. If your savings are not enough to buy a car, a good way to solve the problem can be to take out a car loan. Statistics that claim that in the third quarter of 2024, Americans owed $1.64 trillion on car loans indicate that the population is actively using this credit offer.

But with a car loan, as on the road, you need to follow safety rules: soberly assess your strengths and choose a solution that will not make a hole in your budget.

What is a Car Loan?

A car loan is one of the types of targeted loans. The main feature of a car loan is that until you repay the loan, the vehicle will be pledged to the bank. In other words, you will not be able to sell it without the permission of the financial institution.

A loan is issued to purchase a new or used car. At the same time, a loan can be issued through a financial institution and a car dealership. Car dealerships are often credit intermediaries and have a partnership program with one or more lenders.

You can get a car loan:

From a dealer. They work with banks or non-banks to process loans. Rates may be higher due to dealer markups, but the process is simpler and takes place at the dealership. Compare offers from other lenders to make sure you get the best deal.
From a bank or credit union. Banks, especially local ones like Carroll Community Bank, often offer lower rates and more personalized service. Local banks focus on helping their communities and may provide better rates and terms than larger institutions.
With buy-here, pay-here financing, some dealerships offer in-house financing for those with poor credit. While they approve borrowers with poor credit, the interest rates are higher due to the risk, so evaluate whether the cost of the loan is worth it.

Helpful Steps for Successful Car Purchase with Loan

Choosing the right car loan isn't just a matter of getting the right money. It's a strategic decision that determines how much you'll pay in the future, what hidden costs you might face, and how to avoid unnecessary debt obligations. Here are some tips on how to make the right choice and avoid mistakes that could cost you extra money and stress.

Check Credit Rating

Your credit score plays a significant role in determining the interest rate for your car loan. Before visiting a dealership, check your score and work on improving it if needed.

A good score can help secure a lower interest rate, saving you money in the long run. You can check your score for free once a year through the three major credit bureaus — Equifax, Experian, or TransUnion — at AnnualCreditReport.com. Look for any mistakes, as small errors can negatively impact your score. If you find any, contact the bureau to correct them.

To improve your score, pay off existing debts and keep credit card balances below 30% of your available credit. Timely bill payments are crucial, as they are a key factor in determining your score.

Additionally, avoid applying for too many credit cards or loans in a short period, as each application can reduce your score and affect your loan terms.

When negotiating car loan terms at the dealership, demonstrating knowledge of your credit history can provide an advantage.

Save for a Down Payment

A down payment is more than just a formality; it's your best bet for getting a good deal on a car. Experts recommend putting down at least 20% of the car's price to reduce the loan amount, lower your monthly payments, and lower your overall interest costs.

For example, if you're looking at a $25,000 car, a $5,000 down payment will allow you to take out a smaller loan, meaning you'll pay less interest. Not only will you save money, but you'll also be safer buying a car: a smaller loan means you'll have less risk of owing more than the car is worth.

A down payment is important for several reasons:

Less debt means less overpayment. Every dollar you put down upfront saves you interest over the life of the loan.
Better rates. Banks and credit unions like a low loan-to-value (LTV) ratio. The higher your down payment, the better your terms will be.
Resistance to depreciation. Cars depreciate quickly. With a high down payment, you won't find yourself in a situation where you owe more than your car is worth.

And to save faster, follow these tips:

Goal and plan. Decide how much you need. For example, for a $20,000 car, you'll need at least $4,000. Break that down into monthly goals. If you need to save for a year, that's only $334 per month.
Cut expenses. Rethink your habits: homemade coffee instead of morning lattes, budget travel instead of luxury vacations. Small steps lead to a big goal.
Extra income. Part-time jobs, freelancing, or even renting unnecessary things will help you save up the necessary amount faster.

Compare Offers from Banks and Car Dealerships without Losing Your Mind

Not all offers are created equal. Advertising lures you with low rates or great promotions, but the real picture is often hidden in the fine print. Let's say you have an eye on a car for $30,000.

A bank offers a car loan with a 6% annual interest rate for 5 years. You make a down payment of $6,000. The total overpayment will be about $4,800.
A car dealership offers a loan without a down payment, but with an annual rate of 9%. The total overpayment for the same period will increase to $7,350.

At first glance, the car dealership's offer seems attractive because there is no down payment, but the final cost of the car will be $2,550 higher.

And to avoid mistakes when choosing:

1. Consider the Real Interest Rate

The annual percentage rate, which includes all fees. This is your main reference point. For example, if a bank advertises 4%, but the APR is 5%, the rate includes additional costs.

2. Compare the Total Cost of the Loan

It doesn't matter what the monthly payment looks like - what matters is how much you will end up paying for the car. For example:

At a rate of 6% and a term of 5 years, the payment will be about $464 per month. Total: $27,840 (including overpayment).
At a rate of 9%, the payment will increase to $498, for a total of $29,880.

The difference of $2,040 is the price of your attentiveness when choosing.

3. Beware of “Zero Down Payments”

Car dealerships often offer loans with no down payment, but this increases both the monthly payment and the final overpayment. For example, with a 6% rate and full financing of $30,000, the final overpayment will be $4,920 instead of $4,800.

4. Compare Early Repayment Terms

Some banks and car dealerships in the US charge penalties for early loan closure. If you plan to pay off the debt early, check this point in advance.

5. Consider Dealership Discounts

Sometimes, car dealerships offer a discount on the car when applying for a loan with them. For example, a $2,000 discount can compensate for a higher rate. However, always recalculate the final cost, taking into account all the terms.

Get Preapproval From Your Bank

Before you apply for a car loan, get pre-qualified. This simple step lets you know in advance what terms you might be approved for and avoid any unpleasant surprises. You'll know exactly what amount, interest rate, and loan term you can expect, making your choice much easier and preparing you for negotiations.

Pre-qualification also protects your credit score because it doesn't require a hard credit check. It gives you the opportunity to compare offers from multiple banks, credit unions, or online lenders without risking your financial reputation.

Help in Obtaining a Car Loan: How to Avoid Being Scammed

Many online ads offer help obtaining a car loan or improving your credit history. Organizations or individuals can do this. There are many scammers among them, and you need to be careful.

You can recognize scammers by the following signs:

They demand prepayment for their services, after which they often disappear.
They do not have an official website where you can read reviews, find out the organization's address and phone number, or view the terms and price of the service. Instead, they post information on bulletin boards.
They promise 100% approval of a car loan.
They offer to forge salary documents, which is illegal.

If a car loan is denied, you should not seek help from intermediaries who promise “guaranteed approval” for a fee. It is better to focus on improving your credit rating. To do this, you can:

take out a short-term loan for a small amount and repay it in good faith;
get a higher-paying job;
pay off debts on other loans.