How to shop for car loans

Once you know your budget and have a rough idea of the car you want, shop around for financing, if you’re not paying cash, and get pre-approved for a loan. Your local bank or credit union may be able to offer an appealing interest rate and loan term. There are also online banks that offer auto loans. Then, whether you’re going to a dealer, buying from a used car superstore, or buying online, it’s worth checking their financing options to find out if they can offer a better deal.

Pay close attention to the length of the loan—not just the monthly payment. Before agreeing to a loan that stretches more than 4 or 5 years, make sure you understand the total cost you’ll pay in interest over the life of the loan.

For instance, borrowing $25,000 to buy a new car at a 4% APR for 60 months would cost about $2,625 in interest with a monthly payment of about $460. Looking at the same loan terms for 72 months, the total interest cost would come to $3,161 with a monthly payment of about $391.¹

Try to avoid loan terms that put you under-water or upside-down on your purchase—in other words, owing more on the loan than what the car is worth.

If you’re buying a new car, you may need a sizeable down payment or trade-in to avoid owing more than your car is worth right away. The value of a new vehicle depreciates quickly in the first couple of years of ownership. If anything happens to the car, you’ll still owe the full amount of the loan, unless you’ve bought gap insurance. Gap insurance covers the difference between the value of the car and your outstanding loan balance.