The fine art of choosing an auto loan

To many Americans, owning a vehicle means freedom. And, depending on where you live, you may feel you need a car or a truck to survive. But, unless somebody gives you one or you can afford to pay cash, you may end up needing an auto loan. Here are a few facts about what drives the cost of borrowing and a worksheet for comparing your loan offers.

Six factors that drive auto loan payments

It’s only natural that, when people think about the possibility of an auto loan, they jump immediately to the interest rate. While shopping for rates is important, the questions you should really be thinking about are: How much is this car or truck going to cost me in total? And what will the loan payments mean for my budget, my ability to pay my other bills, and how much I can save for things such as emergencies and retirement? 

The answer to how large and manageable your auto loan payments end up being depends on six factors, which we’ll review quickly here.

1 How much you pay for the vehicle

The average transaction price for a new vehicle as of November 2019 was a record $37,981,1 which is a substantial purchase. That said, things such as comparison shopping (the web’s great for this), bargaining, a smaller option package, rebates and manufacturer/dealer discounts, and keeping several possible models under consideration can all knock some serious money off your purchase price. 

2 Your down payment (including any trade-in)

The more you put down in cash, the less you’ll need to borrow. While the amount you put down is totally your decision, if you’re trading in a car, the size of your trade-in allowance may be negotiable. Of course, there’s an alternative to a trade-in: You could also sell your vehicle yourself, then add the proceeds to your down payment.

3 The loan duration

Be careful here. Sure, the monthly payment on a 72-month loan is going to automatically look more affordable than, say, a 36-month loan. But a longer term can also end up increasing your total interest cost. It might also tie you into loan payments for longer than you’re comfortable.

4 The interest rate

Assuming the loan terms are identical, the one with the lower rate will cost you less each month. So, yes, it makes sense to shop around. Keep in mind that financial institutions may change rates frequently. Also, keep your eyes open for the interest-rate specials (sometimes as low as 0%) that manufacturers and dealer groups use to get customers on to their lots.

5 Your credit score

Speaking of interest rates, good credit will get you better choices. According to credit monitoring company Experian, average first-quarter auto loan rates for new vehicles ranged from 3.65% to 11.92% based on credit score. Average rates on used vehicles spanned from 4.29% up to 17.74%.

Average auto loan rates by credit score—first quarter 2020:

Credit score Average APR new car Average APR used car
781-850 3.65% 4.29%
661-780 4.68% 6.04%
601-660 7.65% 11.26%
501-600 11.92% 17.74%

This sample is for illustrative purposes only.

Source: “State of the Automotive Finance Market Q1 2020,” Experian Information Solutions, Inc., 2020.

6 The early repayment option

A lot can change in your financial life in the months and years after you buy a new vehicle. You may find yourself wanting or needing a mortgage, the ability to save for a child’s education, a fresh start with your personal budget, or a better credit rating. Or, maybe you’ll want to sock more away in your 401(k) plan. Repaying your auto loan early will reduce the total interest you end up paying over time—and free up resources for other important financial goals. Make sure your loan makes it free or very affordable to repay early.

Comparing your auto loan offers

Before you sign with a lender, use a simple scratch sheet such as this to get a clear look at the loans you’ve been offered. Please note that it doesn’t include the cost of loan insurance or other add-ons the seller might offer you.

  Loan offer 1 Loan offer 2 Loan offer 3
Name of lender ____________________ ____________________ ____________________
Negoitiated price of car (including all dealer fees) $____________ $____________ $____________
Down payment $____________ $____________ $____________
Trade-in allowance (may add to your final cost, if any balance you owe is bigger than your negotiated trade-in value) $____________ $____________ $____________
Amount financed $____________ $____________ $____________
Annual percentage rate (APR) __________% __________% __________%
Finance charge (if any) $____________ $____________ $____________
Loan term in months (number of monthly payments) ____________________ ____________________ ____________________
Monthly payment amount $____________ $____________ $____________
Total cost of payments (number of monthly payments multiplied by monthly payment amount) $____________ $____________ $____________

This sample is for illustrative purposes only.

From auto loans to retirement saving, make sure to get the information you need

Life is full of financial decisions. Whichever milestone you’re reaching, make sure you understand the basics, so you can make an informed decision. 

Before you sign your name to an auto loan, take the time to review and understand how much the transaction could really cost, and what you can do to keep it in a comfortable range. Shop around with a few financial institutions, including your own bank or credit union, for the best rates. The web is great for this, so use it.

And, most important of all: When the deal is complete, make sure to enjoy the ride.


1 Auto loan rate forecast for 2020,”, January 2020.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.