5 Signs Your Car Loan Is a Good Deal

A good car loan saves money, protects flexibility, and supports your long-term financial goals. What that looks like can vary from person to person, but these five signs can help you decide if your loan is working in your favor.

1. Your interest rate is competitive for your credit profile.

Your credit score is a major factor in the rates lenders offer. To see if your rate is competitive, compare it to the average for your credit tier. Experian updates this data quarterly in its State of the Automotive Finance Market using the following VantageScore® ranges:

Super prime: 781 or above
Prime: 661-780
Near prime: 601-660
Subprime: 501-600
Deep subprime: 300-500

While interest rate is the number most shoppers focus on – and what most car dealers advertise – your loan’s annual percentage rate (APR) tells you more about the full cost. It includes your interest rate plus most lender fees. If two loans have the same interest rate but different APRs, the one with the lower APR will cost you less in the long run.

Pro tip: Consider getting preapproved by a bank or credit union before shopping. Not only does that give you a better idea of what you can afford, but it can also give you leverage when negotiating a deal.

2. The monthly payment fits comfortably in your budget.

The rule of thumb is to spend no more than 10% of your monthly take-home pay on your car payment. That percentage should leave enough room in your budget for other necessities, like housing and food.

But comfort isn’t just about making payments today. Car loans typically last for several years, and a lot can change in that time. For example, you may feel more comfortable if your budget has extra room in case:

Gas prices go up.
Insurance premiums increase.
Your commute changes.
You have an unexpected medical expense or home repair.
You face a drop in income.

Spending 10% is probably fine if you can still put some money towards savings and cover your other living expenses. But if 10% makes it harder to cover essentials or surprise costs, you might aim for a more conservative range of 5% to 8%.

Pro tip: A lower interest rate can help keep your monthly payments in check. Improve your credit score and compare multiple offers to find a competitive rate.

3. The loan term balances affordability and total cost.

The typical auto loan term may range between 24 and 84 months, but some can be as short as 12 months or as long as 96 months. A longer-term loan can be appealing because it usually lowers your monthly payment. However, shorter terms lower the overall cost of the loan because you pay interest for fewer months.

That said, a slightly longer term, perhaps in the 48- to 60-month range, can make sense if you need more flexibility in your monthly budget. This may be particularly true if you qualify for a very low rate.

Pro tip: Be wary of loan terms that are 72 months or longer. They may significantly increase your total interest and increase your risk of negative equity, or owing more on the loan than the car is worth.

4. You made a substantial down payment or have positive equity.

Being able to make a down payment, preferably between 10% and 20% of the cost of the car, is often a sign that your loan is a good deal. A large down payment:

Lowers the amount you have to borrow.
Reduces the total interest you’ll end up paying.
Helps you avoid negative equity.

These three benefits are closely connected. First, lenders calculate interest on the loan balance. So if your interest rate and loan term stay the same, borrowing less means paying less total interest.

Paying less interest allows more of your monthly payment to go toward the principal. Reducing your balance faster lets you build equity in your car more quickly, making it less likely that you’ll end up owing more than the car is worth.

A large down payment isn’t the only way to lower your loan amount or pay less interest. For example, trading in your current vehicle can reduce the amount you need to borrow. Just be sure the car has positive equity; otherwise, the dealer may roll your current loan balance into your new loan.

Pro tip: Down payments aren’t always necessary for a good deal. If you qualify for 0% financing or a very low interest rate, you may prefer to keep more cash on hand for savings or other goals, as you won’t save money on interest by paying more upfront.

5. There are no costly extras hidden in the loan.

When you’re ready to sign your loan agreement, the final amount may be higher than you expected. That’s because certain costs, such as document fees, GAP insurance, or service packages, may have been rolled into the financing.

Some extras, like an extended warranty or service plan, can be worthwhile if your circumstances warrant them. But you might also see dealer add-ons you don’t want or need, like window VIN etching or paint protection.

The bottom line? Any optional extra should be chosen intentionally, not automatically bundled into your loan.

Pro tip: Before signing, ask for a line-by-line breakdown of all charges, and say no to anything you don’t understand or value. If necessary, be willing to walk away. That’s better than paying for services you’ll never use.

Know the signs of a smart car loan.

A car loan is more than just a way to get behind the wheel. It’s a commitment that can affect your budget for years. Reviewing the details before you sign can help you drive away with confidence, knowing your financing supports your long-term goals as much as your new car does.

Sources

https://www.experian.com/blogs/ask-experian/average-car-loan-interest-rates-by-credit-score/

https://www.nerdwallet.com/article/loans/auto-loans/much-car-payment

https://consumer.ftc.gov/articles/auto-trade-ins-and-negative-equity-when-you-owe-more-your-car-worth

https://www.edmunds.com/car-buying/being-upside-down.html

https://www.experian.com/blogs/ask-experian/hidden-costs-of-auto-loans/

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