If you’re looking for a new ride, learning how to buy a car is just one part of the process. You’ll also want to know how to nab the best auto loan rates and deals. The steps below could help you find the car of your dreams at a price you can afford.
Before learning how to buy a new car, you need to look at your finances. If you head to the dealer without a firm budget in mind, you could drive off in something you can’t afford.
This is where the 20/4/10 rule can help. When you’re buying a car, you should:
- Make a down payment of at least 20%
- Choose a loan term of four years or less
- Make sure your monthly transportation costs don’t exceed 10% of your monthly income
A down payment of 20% or more can help secure a lower annual percentage rate (APR) and protect you against an upside-down car loan. A four-year loan term could save you thousands of dollars of overall interest. And the monthly cost cap can help you afford your car over the long haul.
Next, use our car affordability calculator to see how much car you can afford. It considers factors like your current auto loan balance, your trade-in value and more.
To use the calculator, you need to have an idea of what your interest rate may be. If you’ve already gotten loan offers, use the most appealing rate. If you aren’t sure, Experian shows that the average rate for new cars was 7.18% in Q4 2023. For used cars, it was 11.93%.
2. Figure out if you’re paying cash or getting a car loan
Once you’ve nailed down your car budget, decide whether you should pay in cash or get a car loan. Both are valid options, but the best choice for you depends on your needs and current financial situation.
Paying in cash
Buying a car with cash can be easy. Cash also allows you to sidestep debt. Just be sure that you don’t wipe out your emergency fund in the process.
| Pros | Cons |
|---|---|
Won’t pay interest, and no fees on private sales Cash can give you negotiating power at the dealership Don’t have to carry comprehensive and collision on your car insurance Will own your car outright | Doesn’t help build credit May need to settle for a cheaper car Can put your savings at risk Taking a large amount of money to buy a car from a private party can be dangerous |
Getting a car loan
Depending on your credit score, getting a car loan might be a great move. If you have excellent credit, you could even qualify for a 0% APR car deal.
| Pros | Cons |
|---|---|
On-time payments can help build or improve credit Monthly car payments can be easier to manage May be able to afford a wider selection of cars Might not need to tap into savings | Interest and fees can make borrowing expensive Late payments will hurt your credit Car isn’t technically yours until you pay it off Usually need to carry comprehensive and collision insurance |
Let’s assume that you’re opting to finance. But what kind of financing should you get? There are different types of auto loans you can choose from, each with its own benefits, pitfalls and rates.
Captive financing: Also called manufacturer financing, captive financing is when you get your car loan directly from your car’s maker. For example, Toyota Motor Credit. Captive financing is where you can find 0% APR car deals. However, you’ll only see these on certain models and model years during promotional events.
Dealer financing: If you let your dealer shop for loans on your behalf, then you’re getting dealer financing. Letting your dealer set up your loan might be convenient, but they have no obligation to shop for the lowest rate. Still, you could unlock lenders that are only available through partner dealerships.
Bank and credit union car loans: You might be able to get a car loan from a bank or credit union. Credit union auto loans, especially, tend to have lower rates. Federal law caps credit union APRs at 18.00%. Banks and credit unions rarely advertise their borrower requirements though, and most banks require good credit to qualify.
In-house financing: You can get in-house financing by shopping at a buy here, pay here car lot. With this, the dealership provides the loan, rather than a lender or bank. These loans have loose eligibility requirements and high rates. If you think that in-house financing is your only option, consider a bad credit car loan instead.
Online auto financing: Good credit or bad, there’s likely an online auto financing company out there for you. You won’t have guidance from a loan officer or dealer, but keeping things online can make it easier to gather up offers.
4. Shop for a car loan
Whenever you’re in the market for a big purchase, it can pay to shop around. This can be especially important with loans. That’s because different lenders can offer different rates for the same borrower.
Here’s how you can go about shopping for an auto loan.
Check your credit score
Your ability to get an affordable auto loan hinges on your credit score. Per Experian data from Q4 2023, borrowers with excellent credit (781+) saw an average APR of 5.64% on new car loans. In comparison, APRs for those with fair to poor credit (501-600) was 12.28%.
Before pursuing a loan, check your score for free with LendingTree Spring. If you have at least good credit (670+), you’ll likely have an easier time finding an affordable car loan. If you’re not quite there, you may want to work on your score or buy an older model with cash.
Apply for preapproval
A preapproved car loan is a conditional offer that shows you what rates and terms you qualify for. These require a hard credit hit. Still, as long as you do your shopping within 14 to 45 days, only one will count against you.
There are a lot of benefits to preapproval. You could have the same negotiating power as cash (since the dealer will know how much you can spend). Getting preapproved with several lenders can also help you find the best rate.
The process is straightforward. You’ll fill out an application, providing information about yourself and your finances. You can usually apply on the lender’s (or manufacturer’s) website. You could also compare several offers at once by using LendingTree’s loan marketplace.
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Compare offers
Comparing car loan offers can be intimidating, but it doesn’t have to be. You just need to know a few definitions.
APR: Your APR, or annual percentage rate, represents the total cost of your loan, including interest and fees. The higher this percentage, the more expensive it is to borrow.
Loan term: A loan term measures how long you have to pay back what you borrowed. A longer term usually means a lower monthly payment since you have more time to pay off your loan. However, the longer your loan is active, the more overall interest you’ll likely pay.
Loan amount: If you are buying an especially expensive (or cheap) car, make sure that the lender can accommodate you. Lenders typically have a minimum and maximum loan amount.
Dealer fees: Generally, dealer fees account for 8% to 10% of a vehicle’s purchase price. Some fees are mandatory (such as sales tax). Others (like documentation fees) might be optional. Fees vary by dealership, so call around and ask for fee schedules before choosing your lot.
Tips for getting the best car loan rate
Improving your credit score is often the best way to get cheap car loan rates, but it’s not an overnight process. In the meantime, consider the strategies below.
Choose a shorter term. Short loan terms usually come with lower rates, and you’ll probably pay less interest overall.
Make a large down payment. Making a large down payment on your car shows the lender that you may be more likely to pay your loan. After all, if the lender repossesses your car, you’ll lose what you put down. In turn, the lender may offer a lower rate.
Add a cosigner. Because a cosigner has equal responsibility to the loan as you, a cosigner is a safety net for the lender. Know, though, that late payments will impact your credit as well as your cosigner’s.
Use a car-buying service. Some lenders (such as PenFed Credit Union) offer an APR discount for using its car-buying service. You might get a discount on your car, too.
To start, decide if you’re buying a brand-new, used or certified pre-owned car. Buying a brand-new vehicle might be thrilling, but keep car depreciation in mind. Most models lose about 20% of their value during the first year of ownership.
Here’s a tip if you’re buying a new car: Check out your car maker’s website before heading to the lot. Many car makers have an online tool that allows you to “build” your desired car, trim level and all. Using this tool can help you decide which options are musts and which are nice-to-haves.
Outside of new or used, consider other priorities such as performance, style, safety and cost of ownership. Once you know what you’re looking for, you can tailor your shopping from there.
You may also want to check out the Insurance Institute of Highway Safety (IIHS) to review crash test ratings. You can also research car safety ratings through the National Highway Traffic Safety Administration (NHTSA).
Once you know what you want to buy, a vehicle-comparison site like TrueCar can help you research vehicles and find dealerships that have your desired car in stock (and at what price).
6. Take a test drive
You can’t just take your dealer’s word for it. Before you buy a car, you’ve got to put it through its paces. Follow traffic laws while you test drive the car, but also:
Pump the breaks. Take the car to an empty parking lot, get it up to a moderate, safe speed and hit the brakes. Note their responsiveness.
Hit the highway. Pick a time when traffic is light, hop on the expressway and get the car up to the speed limit. Notice how it handles and whether it drifts to a certain side.
Turn down the radio. While you’re on the road, turn off the tunes and listen for any disconcerting knocks.
Bring a friend. Bring along a mechanically inclined friend and have them peek under the hood.
Now you’re ready to go to the dealership, maybe with a preapproved car loan in hand. Here’s what you can do to (hopefully) get the best sale price.
Maximize your trade-in. Before you sell your car or trade it in, you should estimate your car’s value. You can do this with Kelley Blue Book’s online appraisal tool. Knowing what your car is worth can help you avoid getting fleeced.
Ask for the out-the-door price. Don’t just focus on the cost of the car itself. Instead, ask for the out-the-door price. You might be surprised by how much things like dealer fees and titling costs can add to your bottom line.
Consider negotiating. If you’re up for it, negotiating a car price can be worth it. During negotiations, you might learn that you qualify for a car rebate. Or you may get the dealer to lower its sale price to compensate for a mandatory dealer fee.
Skip unnecessary extras. Your finance manager will likely offer you a package of optional extended warranties and service packages during loan closing. You might be encouraged to opt in for things you don’t really need. Don’t fall for high-pressure sales tactics.
8. Buy your car
You’re almost ready to hit the road. But first, you need to apply for your auto loan and finish buying your car.
The process of applying for an auto loan depends on the type of loan you’re getting. If you’re moving forward with a preapproved loan, you can contact the lender (or in most cases, visit its website) and formally apply.
You may be able to apply for captive financing online, but some manufacturers require you to go through your dealer. If you don’t qualify for captive financing, your dealer may also offer to set you up with a partner lender.
Regardless of the route you take, the act of applying is usually the same. You’ll answer questions about yourself, your employment and where you live. You should also be prepared to provide bank statements or W-2s, as well as a government-issued ID.
