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Quick Car Loan Guide

Updated: April 1, 2024

 

 

Car loans mistakes to avoid

Start shopping before you know what you can afford

 
A big car and a little budget is a recipe for disappointment. Find out how much you can afford to pay for a car before you start shopping. It’ll save you time and disappointment.
 

Ideally, get pre-approved for your car loan application by finding out how much you can get AND see if that fit your budget.

If you have little credit history or worthiness, or maybe even bad credit, it’s usually possible to get a loan. This is because car loans are usually secured by the value of the car: this also means if you can’t pay they’ll take the car back.

Also, don’t forget to think about the cost of the insurance for your car. Usually, the more expensive the car, the more expansive your car insurance will be. And just like your loan, you should shop and get get quotes for your car insurance. You should include the insurance cost and sales tax in your calculation of your car cost.

 

Focusing on your monthly payment instead of the total cost

 
Look at the total cost of your loan (the sum of all monthly payments) and not only the cost of the monthly car payment. If you only look at the monthly cost, you may pay for a more expensive car on more years (and then paying a lot more of interest) than a cheaper car with a little higher monthly payments over fewer years. The idea is for you to calculate the sum of all payments and only then decide if it makes sense for your budget. This will let you see how much interest in total you’ll pay.
 
In general, your car loan payment will be automatic payments taken out of your checking account or savings account.

 

Add-on from the dealership

 
Adding lots of extra features and shiny things to the car can sound nice but there again calculate how they’ll add to your monthly payments AND total cost. If you want them some time it’ll be much cheaper to buy those from a third party than the dealership.

 

Complete all loan and purchase documents before driving away

 
Some dealer may let you leave with the car (spot purchase) before all documents have been completed. Never do this if you have another choice. If something happens to the car before all documents are signed you’ll be in a grey zone where it may get very complicated to complete the purchase or loan disbursement.

 

Not shopping around for the car and its financing

 
You compare car prices; you should do the same with your auto financing options. If how much you pay is important for you, always do the math of the total cost. Sometimes a 0% interest from the dealership can be a good thing if you have little credit and they accept you, some other time, it may not be such a good deal if you can’t get the dealer rebate.

 

How to get the lowest rate

 
Getting the lowest car loan rate is simple. You have to shop and shop around.
 

New car:

1- The dealership selling you a new car usually have a very low rate. See with them first.

2- Then ask your bank for their rate or go see a federal credit union. If you already have a customer history with them it should be quick and their loan may be quite low too. That’s because your loan would be guaranteed by the car (which mean if you don’t pay they may repossess the car).

Used car:

1- If a dealer sells you the car they may offer you a loan but you should compare their rate and term with rates from a bank or credit union. If your credit is not good the dealer rate may be higher than a federally insured bank or credit union.

2- If you’re buying a from an individual most of the time a credit union or bank is the best way for you to get a car loan.

 

Online lenders:

 
There are many online lenders and site to compare quotes for car loans. They usually provide loan to all credit types. Naturally bad credit gets higher rates than good credit but in general, because those online services have the lower cost they rates are often lower than traditional lenders.

 

Can I negotiate my car loan rate?

 

Dealerships

Because their rates are usually very low they’ve little room to lower their rates further. What you can negotiate more easily is usually little add-on to your car for free or good discounts.

 

Banks

Having good credit and history for other services with a bank may help you get a lower rate.

 

Credit unions

There’s usually a little bit of room to lower your rate with a credit union, but not a whole lot.

 

Always shop car loan rates

You should get rates from a few sources (like the online lenders at the top of this page) to see who can provide you the lowest rate and best term for your car loan. With the best rate in hand, if you have a favorite lender or would like to get your loan from your bank/credit union you should show them the low rate you’re able to get elsewhere and see if they can match theirs or at least lower it.

Get car loan quotes from a few places won’t affect your credit score as a quote is only a soft pull of your credit and it’s done within 30 days. A complete credit review will only be done when you apply for a loan (getting a quote may not always be the final rate).

 

Key things to remember

 
1- Make a budget: How much can you afford monthly? How much are you ready to pay in total (all monthly payments plus fees)?

2- Shop for your car price AND shop for your car loan rate: You can usually negotiate the loan rate, term, fees (like finance charge, prepayment, penalty if you finish paying before the end of the loan term, length of the loan, etc).

3- Documents: Are all blank space filled? Do you have a copy of the loan? Did you and the lender sign the loan document?

4- Are you comfortable with this deal? If you’re not, then ask yourself why. It should give you the answer and pick a car and loan better fitting your budget.

 

Banks offering car loans and other vehicles loans

Banks New Car Used Car New loan Refinance Show Rates Car Moto RV Boats Show Rates
Chase Yes Yes Yes Yes Yes Yes No No No Yes
Bank of America Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Wells Fargo Yes Yes Yes Yes Yes Yes Yes Yes Yes No
US Bank Yes Yes Yes Yes Yes Yes Yes Yes Yes No
USAA Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
State Farm Bank Yes Yes Yes Yes Yes Yes Yes Yes Yes No
Citizen Bank Yes Yes Yes Yes Yes Yes Yes Yes Yes No
Capital One Yes Yes Yes Yes Yes Yes Yes Yes Yes No
KeyBank Yes Yes Yes Yes Yes Yes Yes Yes Yes No
PNC Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
SunTrust Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Ally Bank Yes Yes Yes Yes Yes Yes Yes Yes Yes No
BBT Yes Yes Yes Yes Yes Yes Yes Yes Yes No
CommerceBank Yes Yes Yes Yes Yes Yes Yes Yes Yes No
Fifth Third Bank Yes Yes Yes Yes Yes Yes Yes Yes Yes No
Huntington Bank Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

 

 

Car leasing errors to avoid

 

Paying too much upfront

 
Try to aim to not give more than $2,000 for upfront payment on a lease. Yes, a bigger one should reduce your monthly lease, but if something happens to the car before the end of the leave you may lose that upfront payment. You can always put your upfront loan amounts in a CD for the term of the lease and make a little bit of money instead. Ideally, calculate and compare the lease total cost: much you’d pay with a very small or no upfront vs a higher one.

 

Not having GAP insurance

 
If something happens to the car before the end of your lease you may have to pay the difference between the residual value (the value of the car at the end of you do a lease buyout. Example $12,000) and market value of the car decided by the insurance company if you have accident (example $8,000). That different (here $4,000) is the GAP (Guaranteed Asset Protection) you’d have to pay if you don’t have that GAP covered in your lease insurance. If you don’t, it’s usually worthwhile subscribing to GAP insurance.

 

Underestimate your mileage

 
Your lease comes with a general yearly mileage included in your monthly price. Make sure you estimate it correctly because doing more mileage means you’ll have to pay a, sometimes big, supplement when you bring back the car at the end of your lease. If you see you’ll go over the agreed mileage contact the company to pay an extra each month instead of keeping it all for a big payment at the end of your lease.

 

Car maintenance

 
Make sure you understand what is involved with normal wear and tear in your lease. Yes, it’s a lease but you should still maintain it. If some minor or bigger damage is found at the end of the lease the dealer may charge you full market price for repairs (and yes dealerships repair prices are usually higher).

 

Too long car lease

 
This depends on the car brand. Most brands have a 3 years guarantee. If you take lease longer than the car warranty you may be responsible for repairs when the warranty finishes. If you do you should take insurance when the warranty is over.

If you want to lease for a long period, you should calculate how much it would cost you to buy it instead of leasing.

 

April 2024 Car Loans Rates by State and Credit Scores

      Credit Score    
State Excellent Good Average Bad Poor
  720 – 850 690 – 719 630 – 689 580 – 629 below 580
Nationally 2.4% 3.9% 7.3% 10.0% 14.3%
Banks 3.4% 5.6% 8.1% 11.4% 15.1%
Credit Unions 2.3% 4.1% 6.2% 10.0% 14.2%
Car dealers 2.0% 3.2% 2.4% 3.2% 4.1%
New car 2.2% 3.4% 6.5% 10.2% 12.2%
Used car 4.9% 5.2% 7.5% 10.5% 13.7%
Alabama 2.5% 3.4% 7.2% 11.4% 15.2%
Alaska 2.5% 3.3% 7.1% 9.2% 14.3%
Arizona 2.5% 3.4% 6.1% 8.1% 13.6%
Arkansas 2.6% 3.4% 6.0% 9.5% 12.1%
California 2.4% 3.5% 5.5% 8.2% 13.0%
Colorado 2.6% 3.6% 5.4% 8.0% 10.7%
Connecticut 2.5% 3.5% 5.3% 8.1% 13.2%
Delaware 2.3% 3.6% 5.3% 8.5% 13.4%
DC 2.3% 3.5% 6.3% 9.0% 12.4%
Florida 2.7% 3.4% 6.0% 8.8% 14.2%
Georgia 2.6% 3.6% 6.0% 9.4% 14.6%
Hawaii 2.3% 3.4% 6.2% 9.7% 14.3%
Idaho 2.5% 3.4% 5.6% 9.0% 13.1%
Illinois 2.3% 3.5% 5.8% 9.1% 13.4%
Indiana 2.4% 3.5% 6.2% 9.0% 14.2%
Iowa 2.3% 3.4% 5.6% 9.3% 14.0%
Kansas 2.5% 3.6% 5.4% 9.3% 13.6%
Kentucky 2.5% 3.7% 5.3% 9.1% 14.1%
Louisiana 2.4% 3.8% 6.4% 9.3% 15.5%
Maryland 2.3% 3.5% 4.6% 9.1% 12.3%
Massachusetts 2.3% 3.5% 4.5% 8.9% 13.5%
Michigan 2.2% 3.6% 6.1% 8.7% 14.1%
Minnesota 2.7% 3.6% 5.4% 9.0% 13.7%
Mississippi 2.2% 3.6% 6.5% 10.2% 16.1%
Missouri 2.3% 3.4% 7.0% 13.5% 16.5%
Montana 2.4% 3.4% 6.2% 9.2% 14.1%
Nebraska 2.4% 3.9% 6.2% 9.2% 14.2%
Nevada 2.4% 3.4% 5.7% 9.6% 13.1%
New Hampshire 2.3% 3.6% 5.6% 9.6% 15.0%
New Jersey 2.4% 3.5% 6.1% 9.2% 12.3%
New Mexico 2.4% 3.6% 6.5% 8.6% 13.0%
New York 2.3% 3.6% 6.0% 9.3% 12.5%
North Carolina 2.3% 3.5% 6.6% 9.1% 13.0%
North Dakota 2.3% 3.5% 6.6% 9.8% 15.4%
Ohio 2.5% 3.5% 5.3% 9.1% 14.3%
Oklahoma 2.4% 3.7% 5.3% 8.1% 12.4%
Oregon 2.3% 3.4% 5.8% 9.4% 15.2%
Pennsylvania 2.3% 3.6% 7.0% 10.8% 14.2%
Rhode Island 2.4% 3.6% 5.9% 9.4% 12.1%
South Carolina 2.2% 3.7% 5.4% 8.2% 12.7%
South Dakota 2.4% 3.6% 7.0% 11.3% 15.1%
Tennessee 2.4% 3.7% 7.1% 11.4% 14.1%
Texas 2.4% 2.7% 5.9% 8.9% 13.6%
Utah 2.3% 3.6% 5.9% 9.5% 14.5%
Vermont 2.4% 3.7% 6.3% 9.8% 12.3%
Virginia 2.3% 3.7% 6.2% 8.2% 13.4%
Washington 2.4% 3.8% 6.6% 9.5% 14.3%
West Virginia 2.3% 3.9% 6.3% 9.4% 14.1%
Wisconsin 2.3% 3.7% 5.9% 7.8% 13.1%
Wyoming 2.3% 3.6% 5.4% 9.1% 14.3%
Source: MFP’s Users survey (over 36,101 users) who shared new their car loan annual percentage interest rate (APR) between March 1 to 31 2024.

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Refinancing your car loan

 
Refinancing your car loan means you get another loan, ideally at a lower rate, to pay your first loan and ideally save money each month.

The loan is usually secured by the car and it’s paid monthly over a few years.

If you have a tight budget, it may be worthwhile refinancing even if the new rate is not lower than your current rate. You can get a loan over a longer period of time than what’s left in your existing loan. This will reduce your monthly payments, but it’ll also mean you’ll end up paying more in interest for your new loan term.

 

When refinancing make sense?

 

Your financial situation improved.

 
You have less debt and/or more income, which improve your debt to income ratio. This would improve your credit score, and enable you to get a better rate.

 

You can access a lower interest rate.

 
Interest rates change continuously so actual rates may be lower than your existing car loan rate. This can make you save a substantial amount of money each month.

 

Your budget is tighter.

 
Your budget may face a shortcoming and paying all your bills may become stressful and more complicated. By taking a longer loan term you reduce your monthly payment, but at the same time, you may pay more in interest. If this improves your stress level and gives you more financial leeway, it may be worth it.

 

You didn’t get the best rate on your existing loan

 
It may happen you didn’t get the best rate on your car loan when you purchase your car. This may be due to not shopping enough for the best rate or having a worst credit at the time.

 

When refinancing makes less or no sense?

 

Your car depreciated fast

 
Whether you have a lot of mileage, had an accident reducing the car value, it may be hard to refinance. It usually easy to refinance the first few years but a car 7 years old, or more and with more than 75,000 miles, may be hard to refinance with lenders.

 

Too much pre-payment penalties make it not worth it

 
Your existing car loan may have pre-payment penalties that make it hard to get out of your loan and make it costly, thus not worthwhile.
Then your new loan may have some fees too, so make sure you do the math and see if the fees makes sense financially.

 

You already paid most of your existing loan

 
Some loan put more interest at the beginning of the loan, which makes it less interesting to refinance as the interest savings may be very small and not worth it.

 

Common refinance questions

 

Can I refinance if I’m upside down on my loan?

 
Being upside-down mean your car value is less than the balance of your car loan.

You may be able to refinance if you have decent credit to get a lower rate which can shorten your loan term and be able to have a loan and car value very similar.

You may also be able to refinance if you can put up with enough money to pay down your loan balance to make it equals to your car value.

Some lenders may let you give other collateral to make up the difference in your loan to value ratio.

 

What happens if I take a longer term than my existing one?

 
You should be able to save money every month on your car loan payment, but you may also end up paying more interest in total. This may offset your monthly savings.

Be careful that getting a longer term does not put you upside-down on your loan. If you have an accident and your insurance doesn’t cover all the cost of repair, your car may end up having a lower value than your car loan balance, which is the definition of being upside down.

 

Who benefits the most by refinancing?

 
As long as you get a lower interest rate, you should be able to save monthly, but the biggest benefactor of refinancing are people who improve their credit and can now get a much better rate. You may go from 11% to 6%, which can bring big savings month after month.

People with good or great credit usually benefit the least as their interest rates are usually very low. Going from 2.5% to 1% won’t bring big savings unless you still have a big car loan balance.

 

What are the usual terms available?

 
Because of the remaining number of months on a loan varies greatly, the terms on a refinance loan varies from 24 months to 84 months, but 24 to 60 months are more frequent.

 

Who provides the best rate to refinance?

 
The 3 main institutions offering refinancing vehicle loans are banks, credit unions, and online lenders. Banks usually have rates a little higher while credit unions and online lenders have the lowest ones.

 

April 2024 Car Refinance Rates by Lenders and Credit Scores

      Credit Score    
  Excellent Good Average Bad Poor
  720 – 850 690 – 719 630 – 689 580 – 629 below 580
Nationally 2.8% 4.8% 6.3% 7.2% 9.3%
Banks 3.1% 4.6% 6.9% 8.8% 10.3%
Credit Unions 2.6% 3.3% 5.4% 7.8% 10.3%
Online lenders 2.6% 2.8% 4.7% 6.4% 9.3%
Source: MFP’s Users survey (over 35,198 users) who shared their car refinance APR interest rate between March 1 to 31 2024.
 
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