Make a smart car financing decision by comparing pre-approval offers, understanding term lengths, calculating total cost of ownership, and choosing between dealer and direct lender financing.
Check your credit score before applying for any loans
A score of 720+ qualifies for the best auto loan rates (typically 4-6% APR). Scores of 660-719 add 2-4% to your rate. Below 660, expect rates of 10-15% or higher. Check your score free through your bank or credit card.
Get pre-approved by your bank or credit union before visiting dealers
Credit unions typically offer rates 1-2% lower than banks, which are 1-2% lower than dealer financing. Walking in with a pre-approval gives you a comparison baseline and negotiating power.
Apply to 3-5 lenders within a 14-day window
Multiple auto loan inquiries within 14 days count as a single inquiry on your credit report. Apply to your bank, a credit union, an online lender, and the dealer to compare. Rate differences of even 1% matter significantly.
Compare APR, not just the monthly payment
Dealers often quote low monthly payments by extending the loan term, which increases total interest paid. A $30,000 loan at 6% for 60 months costs $4,800 in interest. The same loan for 72 months costs $5,800.
Loan Term and Down Payment
Choose a loan term of 36-60 months
A 36-month loan has the lowest total cost but highest monthly payment. A 60-month loan is the longest recommended term. Loans of 72-84 months result in being underwater (owing more than the car is worth) for years.
Plan a down payment of at least 20%
A 20% down payment on a $30,000 vehicle is $6,000, reducing your loan to $24,000. This avoids being upside-down on the loan since new cars depreciate 20-30% in the first year. Less than 10% down often requires gap insurance.
Calculate the total cost of the loan, not just the monthly payment
Multiply the monthly payment by the number of months and add the down payment. A $500/month payment for 60 months is $30,000 in payments alone. Add a $5,000 down payment and you have paid $35,000 total for the vehicle.
Factor in your trade-in value if applicable
Get your trade-in appraised at 2-3 dealerships and check online valuation tools before negotiating. Dealers often inflate the trade-in offer while marking up the new car price. Negotiate each transaction separately.
Dealer vs Direct Lender Comparison
Ask the dealer to match or beat your pre-approved rate
Dealers can sometimes access manufacturer incentive rates (0-2.9% APR) that beat bank rates. But standard dealer financing adds a 1-2% markup to the rate they receive from the lender. Your pre-approval forces them to compete.
Read every line of the dealer finance contract
Watch for add-ons buried in the paperwork including extended warranties ($1,500-3,000), paint protection ($300-1,000), and fabric coating ($200-500). These are negotiable or can be purchased cheaper elsewhere.
Compare manufacturer financing incentives vs rebates
Manufacturers sometimes offer a choice between 0% financing or a $2,000-5,000 cash rebate. A $30,000 car with a $3,000 rebate at 5% interest often costs less than the same car at 0% with no rebate on loans under 48 months.
Total Cost of Ownership
Research insurance costs before committing to a vehicle
Get insurance quotes for the specific vehicle before buying. Sports cars and luxury vehicles can cost $200-400 more per month to insure than sedans. A car you can afford to buy may be too expensive to insure.
Estimate annual maintenance and repair costs
Average annual maintenance costs range from $500 for economy cars to $1,200+ for luxury brands. Vehicles out of warranty should have a repair fund of $100-200 per month. Check reliability ratings before purchasing.
Calculate monthly fuel or charging costs
At $3.50 per gallon and 15,000 miles per year, a 25 MPG car costs $175/month in fuel while a 35 MPG car costs $125/month. An electric vehicle costs roughly $50-75/month to charge at home.
Apply the 20/4/10 rule to determine affordability
Put at least 20% down, finance for no more than 4 years (48 months), and keep total transportation costs (payment, insurance, fuel, maintenance) under 10% of gross monthly income.
Gap Insurance and Loan Protection
Determine if you need gap insurance
Gap insurance covers the difference between what you owe and what the car is worth if totaled. You need it if your down payment is less than 20%, your loan term exceeds 60 months, or you are rolling negative equity from a previous loan.
Buy gap insurance from your auto insurer, not the dealer
Dealers charge $500-1,000 for gap insurance added to your loan balance (so you pay interest on it). Your auto insurance company typically offers the same coverage for $20-50 per year. Some even include it free with certain policies.
Confirm there is no prepayment penalty on your loan
Most auto loans have no prepayment penalty, but verify before signing. If your finances improve, making extra payments or paying off the loan early can save hundreds to thousands in interest.
Frequently Asked Questions
What is a good interest rate for a car loan?
Early 2026 rates: 5.5-7.5% for excellent credit (750+), 7-10% for good, 10-15%+ for fair/poor. Used cars run 1-2% higher. Credit unions are 0.5-1.5% cheaper than dealers. Above 10%, consider delaying to improve your credit first.
Should I choose a 48-month or 72-month car loan?
On $30,000 at 7%: 48 months costs $4,400 interest versus $6,800 for 72 months. If the 48-month payment exceeds 10-15% of take-home pay, 60 months is reasonable. Avoid 84-month terms which maximize interest and negative equity risk.
Is it better to buy or lease a car?
Over 10 years, buying is almost always cheaper. Leasing offers lower payments but you own nothing and face mileage penalties (12,000-15,000 miles/year limit). Leasing works for low-mileage drivers or business write-offs.
How much should I put down on a car?
20% prevents negative equity in early ownership. On $30,000, that means $6,000 down. At minimum, cover sales tax and registration out of pocket. Trade-in value counts toward the down payment.