What to consider before taking out a car loan
New vs. used car
When buying a car, you’ll need to decide whether to get a new or used vehicle. This can play a role in what financing options are available to you and how much of an auto loan you’ll need to take out.
A new car purchase generally comes with better and more convenient financing options. Used cars, on the other hand, tend to cost less.
Leasing vs. buying a car
Another factor to consider when shopping for a new vehicle is whether you want to buy or lease a car. Instead of owning your car at the end of your auto loan, leasing a car requires that you make monthly loan payments for a predetermined amount of time. Once that time is up, you’ll have to return the car.
Some lenders offer car lease buyouts, which extend the option to purchase your car, typically at the end of your lease. However, you may have the option to buy your car earlier in the lease, too.
Getting preapproved for a car loan
Shopping around and getting preapproved car loans from banks, credit unions and/or online lenders can give you an advantage during the vehicle financing process. Be sure to get preapproved with at least three lenders so you can compare car loan rates, terms and borrowing amounts.
Preapproval requires a hard credit pull — which can bring your credit score down by a few points —- but is a firm offer from a lender. Once you close on your loan, your APR will be similar, if not the same, as your preapproved rate. You can use these offers to negotiate with lenders.
Trading in your car
If you currently own a vehicle, you can trade in your car and put its value toward your car payment. You can determine your car’s worth by using online resources such as Kelley Blue Book (KBB), National Automobile Dealers Association (NADA) or Edmunds.
However, you may make more money if you sell your car privately through a site like Craigslist.
Vehicle rebates
A vehicle rebate is a discount some auto manufacturers offer on new cars. Car rebates can include cash discounts, low auto loan rates and special lease deals. For instance, some auto companies, like Toyota, offer 0% APR car deals.
Car loan fees
As with many forms of credit, you may have to pay some car loan fees when you buy your new vehicle. Some common types of fees include registration and title fees, administrative fees and destination charges (if you have the vehicle shipped). Keep in mind these dealer fees to avoid buying a car since they can unnecessarily add to the total cost of your bill.
Car loan taxes
When you buy a car, you’ll need to pay local and state taxes on your purchase. The most common tax that comes with a car loan is a sales tax. Some states, such as Oregon, don’t charge a sales tax or levy local sales taxes. Other states, such as California, charge sales tax as high as 7.25%.
In some instances, buying a car is tax-deductible. For instance, when you file your taxes, you may be able to deduct the sales tax you paid on your car.
FAQs
Car loan payment formula
Monthly payment = (loan amount) × (interest rate / 12) / (1 − (1 + (interest rate / 12)) ^ (-loan term)).
How much would a monthly payment be on a $25,000 car loan? ›
Example: A six year fixed-rate loan for a $25,000 new car, with 20% down, requires a $20,000 loan. Based on a simple interest rate of 3.4% and a loan fee of $200, this loan would have 72 monthly payments of $310.54 each and an annual percentage rate (APR) of 3.74%.
How much is the monthly payment on a $20000 car loan? ›
For instance, using our loan calculator, if you buy a $20,000 vehicle at 5% APR for 60 months the monthly payment would be $377.42 and you would pay $2,645.48 in interest.
What would payments be on a $30,000 car loan? ›
A $30,000 auto loan balance with an average interest rate of 5.0% paid over a 6 year term will have a monthly payment of $483. In total, the loan will cost $34,787 with $4,787 in interest.
What is a realistic monthly car payment? ›
Use your annual income as a starting point to calculate how much car you can afford based on monthly payments. Financial experts recommend spending no more than about 10% to 15% of your monthly take-home pay on an auto loan payment.
What is the formula for calculating monthly installment payments? ›
The formula to calculate EMI is P x R x (1+R)^N / [(1+R)^N-1] – where, “P” is the principal loan amount, “N” in tenure in months, and “R” is the prevailing interest rate.
What credit score is needed for a $25,000 car loan? ›
The credit score required and other eligibility factors for buying a car vary by lender and loan terms. Still, you typically need a good credit score of 661 or higher to qualify for an auto loan. About 69% of retail vehicle financing is for borrowers with credit scores of 661 or higher, according to Experian.
How much is a $40,000 car loan payment 84 months? ›
For example, a car buyer considering a $40,000 new car loan with an 84-month term at 9% APR would have a monthly car payment of about $623 and pay $12,369 in interest over the seven-year loan.
How much should I spend on a car if I make $300,000? ›
So, how much car can you afford? As a rule of thumb, never spend more than 35% of your gross annual income on a car. The following calculator allows you to see enter variables, including down payment, interest rate, and loan term to compare a monthly payment to what's affordable.
How much is a $20,000 loan for 5 years? ›
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| Loan Amount | Loan Term (Years) | Estimated Fixed Monthly Payment* |
|---|
| $20,000 | 5 | $415.07 |
| $25,000 | 3 | $771.81 |
| $25,000 | 5 | $514.57 |
| $30,000 | 3 | $926.18 |
13 more rowsAs most borrow money from banks quite often, they already take care of that by default. On average, they get an APR of 2.89%, which obliges them to pay the following amounts monthly on a $15,000 loan: 12 months. $1269.25.
What would payments be on a $15,000 loan? ›
Representative example of repayment terms for an unsecured personal loan: For $15,000 borrowed over 36 months at 13.99% Annual Percentage Rate (APR), the monthly payment is $513. This example is an estimate only and assumes all payments are made on time.
What is a good credit score for a 30k car? ›
A target credit score of 661 or above should get you a new-car loan with an annual percentage rate of around 7.01% or better, or a used-car loan around 9.73% or lower. Superprime: 781-850. 5.64%.
How much is a $30,000 car payment for 5 years? ›
Provided the down payment is $5,000, the interest rate is 10%, and the loan length is five years, the monthly payment will be $531.18/month. With a $1,000 down payment and an interest rate of 20% with a five year loan, your monthly payment will be $768.32/month.
What credit score is needed to buy a 30k car? ›
Your credit score is a major factor in whether you'll be approved for a car loan. Some lenders use specialized credit scores, such as a FICO Auto Score. In general, you'll need at least prime credit, meaning a credit score of 661 or up, to get a loan at a good interest rate.
How do you calculate what car payment you can afford? ›
It depends on how much income you have after your bills and expenses. But as a rule of thumb, your car payment should not exceed 15% of your post-tax monthly pay. For example, if after taxes, you make the U.S. median income of $37,773, you could shop for a car that costs up to $472 per month.
What is a good interest rate for a car for 72 months? ›
Compare 72-Month Auto Loan Rates
| Lender | Starting APR | Award |
|---|
| 1. MyAutoloan | 5.20% for 72-month auto loans | Best Low-Rate Option |
| 2. Autopay | 4.67%* | Most Well-Rounded |
| 3. Consumers Credit Union | 6.39% for 72-month loans | Most Flexible Terms |
| 4. PenFed Credit Union | 6.14% for 72-month loans | Most Cohesive Process |
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