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9 Things To Know About Car Loans

9 Things To Know About Car Loans

Buying a vehicle is one of the major decisions that one makes after a lot of research and planning. It may even be the second most expensive purchase decision for many people in their entire life.

Moreover, not everyone can buy a car in cash. Financing is the only option for most of the buyers.  Although getting an auto-loan sanctioned and paying it off has become way easier today, there are still a few things that you may need to know about auto loans.

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It’s important to be clear with the basics of auto financing so that later, you aren’t stuck with things unclear in your head.

Following are some of the things you need to know about car loans:

1. Get pre-approved

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It’s always better to get your loan pre-approved before walking into the car lot. Although most dealers would be eager to offer you different financing options, having a loan approved in advance, could help you get better rates and a better price on the car.

The reason is that getting pre-approved puts you in a stronger negotiating position and helps you set a realistic budget to get the best interest rate possible.


Jeanne Lee and Philip Reed of NerdWallet explain that “With your lender-approved blank check or coupon in hand, you’re transformed into a ‘cash buyer,’ at the car lot, and you’re in a much stronger negotiating position,”.


2. Be aware of long-term loans

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One of the important aspects of any loan is its term.  It is one of the most important choices to make when getting a loan. Experts recommend no more than a 60-months loan although the monthly payments would be higher on it.


On the flip side, if you get a longer-term loan, the monthly payments would be lower and that sounds appealing. However, you’ll end up paying more interest on a longer-term loan over time. Moreover, with longer-term loans, the risk of owing more money than the value of the car also increases.


Therefore, it’s better to be clear on the term of the loan, the monthly payments, and the subsequent interest over time.


3. The right credit score is important

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The credit score is the single most significant factor for lenders to determine the type and terms of your loan.

Whether you get it financed from a bank or a dealer, the rate depends on your credit score. Not all lenders look at the credit score the same way and may have different criteria on the minimum score needed to qualify for a loan.  The two important scores used widely by lenders are FICO Auto Score 8 and Vantage Score 3.0. Therefore, it’s important to know beforehand which score is considered by the lender you’re interested in.

This way you can know which credit reports to request and use that information to show to the lenders.  If you don’t know your credit score, you can access a copy of your credit report from the three main reporting bureaus for free. All consumers are allowed one copy per year from


4. Your car would be your collateral

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Car loans generally have lower rates of interest. This is because they are secured loans that require a pledge against the loan. However, unlike other loans, in this case, the vehicle itself will be the collateral. So, in case, you are unable to pay back the loan, the car will be repossessed.


Although the car itself is the collateral in case of an auto loan, the lender will still have some requirements. They will check your income level and will also be interested in your employment status to ensure that you have a steady flow of income. In some cases, they’ll also require you to have a steady residency status. They’ll need you to show that you have been in your present home for at least 12 months.

5. Spend only how much you should

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While there is a difference between how much you’re approved to spend and how much you should spend, many people just don't know it.


It’s always ideal to spend an amount within your budget. You may need to analyze your financial situation and goals for this.


Experts recommend spending no more than 15% of your take-home pay on the total cost of owning a vehicle.

This is important because a vehicle's total cost of ownership is more than the monthly payment. You also need to bear insurance premiums, gas, maintenance costs and, in some cases, parking.

Therefore, you must do thorough budgeting on how much you should spend each month on the loan without getting lured by the approved amount offered by lenders.

 6Check all the insurance options available to you

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Your dealer might be offering you various insurance options in case you die or get stuck with a disability.

However, before committing to the dealer makes sure that you check all the insurance options available to you. For this don’t be hesitant to shop around.

Also, make sure to evaluate all the insurance options thoroughly in light of your needs and requirements.

 7Be cautious of rolling extra charges into your loan

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Many lenders would give you the option of financing not only the vehicle but also the tax, license, registration and other charges.


Although, it may seem tempting and appealing, remember rolling these extra charges will increase your monthly payments and also your subsequent interest rates.


Always remember this rule when evaluating any financing option:


“A lower out-of-pocket expense today, however, comes at the price of higher monthly payments and more money spent on interest”.


Some dealers may even offer to roll your current car loan into your new car loan and it may seem appealing. However, remember it’s a hidden maneuver by dealers when they offer to "pay off what you owe" on your current vehicle.

Doing this may increase your chances of being "upside-down" on your new loan—owing more than it's worth. It can also result in higher interest expenses and increase the chances you'll fall into the same expensive cycle when it comes time to move on to your next vehicle.

 8Bigger down payments mean less expensive loans

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In general, lenders ask for a 15 to 20 percent down payment on auto-loans. However, if you are looking to reduce the monthly payments and make the loan lesser expensive, you can consider making a bigger down payment.


This may be especially suitable when you don’t need the vehicle urgently and you can postpone the purchase for a while to save a little more for the down payment.


If you already have a current vehicle, you can adjust with it for a little longer and save for a bigger down payment.

This will help to reduce the overall monthly payment and interest rates thereby making the loan lesser expensive for you.

 9Look beyond the loan rates

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It’s not just the loan rate that has to be considered while calculating the cost of the loan. Rather you need to look at the total interest over the life of the loan. Taken other things into consideration like license, down payment, tax, and other charges, the total expense of the loan can increase over the life span of the loan.

You also need to look at the lender’s reputation in setting up and servicing the loan. It’s better to avoid a lender with lesser interest rates but a lower reputation.


Final Word 

Those were some of the important things to know before getting an auto loan. Although the points discussed above are basics, it often gets ignored and forgotten.


Remembering these points before getting a car loan will allow to choose your loan terms more wisely and thoughtfully.


If you have any queries or opinions feel free to drop it in the comment box below.

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