Most car buyers borrow at least part of the price, and the loan can cost as much as the difference between two cars. This guide explains how to compare offers by total cost, why preapproval helps, and which extras to be careful with. It is general information, not financial advice.
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Key takeaways
- Compare loans by APR, term and the total you will pay, not only the monthly payment.
- Get a quote from a bank or credit union before you visit a dealer.
- A longer term lowers the payment but usually raises the total interest and the risk of owing more than the car is worth.
- Optional add-ons such as extended warranties and GAP insurance raise the loan, and you can often shop for them elsewhere.
In this guide
How much can I afford to borrow?
Short answer Start from your monthly budget, not the car price. Include insurance, registration, fuel and maintenance as well as the payment, decide how much you can pay down, and avoid stretching the loan just to afford a more expensive car.
Start from your monthly budget, not from the price of the car. Include insurance, registration, fuel and maintenance as well as the loan payment, and decide how much you can pay as a down payment.
Avoid stretching the loan just to afford a more expensive car: a lower price and a shorter loan usually cost less overall.
What should I do before I visit a dealer?
Short answer Get a loan quote from a bank or credit union first. Preapproval lets you compare rates without the pressure of the dealership and gives you something to compare the dealer's offer with. Also check what the car is worth in a price guide.
Get a quote from a bank or credit union before you go. Preapproval lets you compare rates without the time pressure of a dealership and gives you something to compare the dealer's offer with.
Also check what the car is worth using price guides such as Kelley Blue Book, Edmunds or Consumer Reports, and check your credit report so there are no surprises.
What should I compare when I compare loans?
Short answer Compare the annual percentage rate (APR), the interest rate, the length of the loan, the amount financed, any fees and the total you will pay. A low monthly payment can hide a long loan and a high total cost.
A low monthly payment can hide a long loan and a high total cost, so compare:
- the annual percentage rate (APR) and the interest rate
- the length of the loan (the term)
- the amount financed, including taxes, fees and any add-ons
- any fees charged by the lender
- the total amount you will pay over the life of the loan
Is a longer loan a better deal?
Short answer A longer loan lowers the monthly payment but usually costs more in total interest, and it raises the risk of negative equity, which means owing more than the car is worth. A shorter term costs more each month but less overall.
A longer loan lowers the monthly payment, but it usually costs more in total interest. It also raises the risk of negative equity, which means owing more than the car is worth, because cars lose value while you are still paying.
A shorter term costs more each month but less overall. Choose the shortest term you can afford comfortably.
What are add-ons, and are they worth it?
Short answer Add-ons such as extended warranties, GAP insurance and credit insurance can be rolled into the loan, so you pay interest on them. Ask for each price in writing, decide whether you need it, and remember you can often buy these elsewhere.
Add-ons include extended warranties and service contracts, GAP insurance and credit insurance. They can be added to the loan, which means you pay interest on them as well.
Ask for each price in writing, decide whether you really need it, and remember that you can often shop for these products elsewhere. You can usually buy the car without any add-ons.
Should I use dealer financing or my own lender?
Short answer Compare both. Dealer financing is convenient, but your own preapproval gives you a benchmark. Negotiate the price, down payment, APR, loan length and fees separately, and sign only when the written figures match what you agreed.
Dealer financing is convenient and can sometimes beat other offers, but your own preapproval gives you a benchmark to compare it with. Negotiate the price, the down payment, the APR, the loan length and the fees, and ask for the "out-the-door" price in writing.
Read the contract before you sign and check that the figures match what you agreed.
What if I owe more than my current car is worth?
Short answer That is called negative equity. Rolling it into a new loan raises what you owe and the interest you pay. Ask your lender for the payoff amount, consider paying the loan down or waiting, or choose a cheaper car so the new loan stays manageable.
That is called negative equity. If you roll it into a new loan, you borrow more than the new car is worth and pay interest on the old debt as well.
Ask your lender for the payoff amount, check what your car is worth, and consider paying the loan down, waiting, or choosing a cheaper car so the new loan stays manageable. Our guide on buying a used car safely covers the rest of the checklist.
Sources and further reading
- CFPB: Auto loans
- CFPB: What should I know before I shop for a car or auto loan?
- FTC: Auto warranties and auto service contracts
How this guide was prepared
This guide is written from official and industry sources, which are listed above, and checked against how Motor Mania Club works. We aim to review our guides every few months and change the date when something is updated.
This guide gives general information and is not legal, financial or mechanical advice. Rules differ by state, so check your state agency for the exact requirements.
About the author
Elie Haddad, Founder, Smart Net 360 and Motor Mania Club. Elie Haddad is the founder of Smart Net 360 and of Motor Mania Club, the US automotive marketplace and directory that connects dealers, parts suppliers, garages and car enthusiasts. 15 years in business management and a car enthusiast.
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