Money Basics

Getting a car loan

If you plan to finance your car purchase, shop carefully for a loan at local financial institutions and car dealerships. Keep the following tips in mind as you do.

• Consider the term of the loan. This is time it will take you to pay it off unless you decide to pay it off early. A typical term for a car loan is four to five years. A longer-term loan has smaller monthly payments but is more expensive because of interest. Take the shortest loan you can afford.
• Check around and compare interest rates. The rate on a used-car loan will be higher than for a new-car loan, and the term is generally shorter.
• See if your financial institution will preapprove you for a car loan. The lender looks at your income, debts, and other financial data to see how large of a loan you can handle. This is usually a free service. If you know how much of a loan you can get, you will be in a better position to negotiate with a car dealer.
• If you qualify for a large loan, it doesn't mean you should get one. Get what you can afford.
• Although it is usually the first question asked, don't reveal to the dealer how much you can afford to spend on monthly payments. This is because the dealer can manipulate the deal to fit—often not to your advantage—while matching your monthly payment.