Auto Loan Interest Rates At All-Time Low

This Article was Updated July 5, 2018

When you are looking to buy a vehicle, the first thing you should do is apply for a preapproved loan. The loan process can seem daunting, but it’s easier than you think and getting preapproval prior to going to the car dealer may help alleviate a lot of frustration along the way.

Here are five steps for getting a car loan.

  1. Check Your Credit
  2. Know Your Budget
  3. Determine How Much You Can Afford
  4. Get Preapproved
  5. Go Shopping

1. Check Your Credit

Before you shop for a loan, check your credit report. The better your credit, the cheaper it is to borrow money and secure auto financing. With a higher credit score and a better credit history, you may be entitled to lower loan interest rates, and you may also qualify for lower auto insurance premiums.

Review your credit report to look for unusual activity. Dispute errors such as incorrect balances or late payments on your credit report. If you have a lower credit score and would like to give it a bit of a boost before car shopping, pay off credit card balances or smaller loans.

If your credit score is low, don’t fret. A lower score won’t prevent you from getting a loan. But depending on your score, you may end up paying a higher interest rate. If you have a low credit score and want to shoot for lower interest rates, take some time to improve your credit score before you apply for loans or attempt to secure any other auto financing.

2. Know Your Budget

Having a budget and knowing how much of a car payment you can afford is essential. You want to be sure your car payment fits in line with your other financial goals. Yes, you may be able to cover $400 a month, but that amount may take away from your monthly savings goal.

If you don’t already have a budget, start with your monthly income after taxes and subtract your usual monthly expenses and how much you plan to put in savings each month. For bills that don’t come every month, such as Amazon Prime or Xbox Live, take the yearly charge and divide it by 12. Then add the result to your monthly budget. If you’re worried, you spend too much each month, find simple ways to whittle your budget down.

You’ll also want to plan ahead for new car costs, such as vehicle registration and auto insurance, and regular car maintenance, such as oil changes and basic repairs. By knowing your budget and what to expect, you can easily see how much room you have for a car payment.

3. Determine How Much You Can Afford

Once you understand where you are financially, you can decide on a reasonable monthly car payment. For many, a good rule of thumb is to not spend more than 10% of your take-home income on a vehicle. In other words, if you make $60,000 after taxes a year, you shouldn’t spend more than $500 per month on car payments. But depending on your budget, you may be better off with a lower payment.

With a payment in mind, you can use an auto loan calculator to figure out the largest loan you can afford. Simply enter in the monthly payment you’d like, the interest rate, and the loan period. And remember that making a larger down payment can reduce your monthly payment. You can also use an auto loan calculator to break down a total loan amount into monthly payments.

You’ll also want to think about how long you’d like to pay off your loan. Car loan terms are normally three, four, five, or six years long. With a longer loan period, you’ll have lower monthly payments. But beware—a lengthy car loan term can have a negative effect on your finances. First, you’ll spend more on the total price of the vehicle by paying more interest. Second, you may be upside down on the loan for a larger chunk of time, meaning you owe more than the car is actually worth.

4. Get Preapproved

Before you ever set foot on a car lot, you’ll want to be preapproved for a car loan. Research potential loans and then compare the terms, lengths of time, and interest rates to find the best deal. A great place to shop for a car loan is at your local bank or credit union. But don’t stop there—look online too. The loan with the best terms, interest rate, and loan amount will be the one you want to get preapproved for. Just know that preapproved loans only last for a certain amount of time, so it’s best to get preapproved when you’re nearly ready to shop for a car.

However, when you apply, the lender will run a credit check—which will lower your credit score slightly—so you’ll want to keep all your loan applications within a 14-day period. That way, the many credit checks will only show as one inquiry instead of multiple ones.

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When you’re preapproved, the lender decides if you’re eligible and how much you’re eligible for. They’ll also tell you what interest rate you qualify for, so you’ll know what you have to work with before you even walk into a dealership. But keep in mind that preapproved loans aren’t the same as final auto loans. Depending on the car you buy, your final loan could be less than what you were preapproved for.

In most cases, if you secure a pre-approved loan, you shouldn’t have any problems getting a final loan. But being preapproved doesn’t mean you’ll automatically receive a loan when the time comes. Factors such as the info you provided or whether or not the lender agrees on the value of the car can affect the final loan approval. It’s never a deal until it’s a done deal.

If you can’t get preapproved, don’t abandon all hope. You could also try making a larger down payment to reduce the amount you are borrowing, or you could ask someone to cosign on the loan. If you ask someone to cosign, take it seriously. By doing so, you are asking them to put their credit on the line for you and repay the loan if you can’t.

When co-signing a car loan, they do not acquire any rights to the vehicle. They are simply stating that they have agreed to become obligated to repay the total amount of the loan if you were to default or found that you were unable to pay.

Co-signing a car loan is more like an additional form of insurance (or reassurance) for the lender that the debt will be paid no matter what.

Usually, a person with bad credit or less-than-perfect credit may require the assistance of a co-signer for their auto financing and loan.

5. Go Shopping

Now you’re ready to look for a new ride. Put in a little time for research and find cars that are known to be reliable and fit into your budget. You’ll also want to consider size, color, gas mileage, and extra features. Use resources like Consumer Reports to read reviews and get an idea of which cars may be best for you.

Once you have narrowed down the car you are interested in, investigate how much it’s worth, so you aren’t accidentally duped. Sites such as Kelley Blue Book or Edmunds can help you figure out the going rate for your ideal car. After you’re armed with this information, compare prices at different car dealerships in your area. And don’t forget to check dealer incentives and rebates to get the best possible price.

By following these steps, you’ll be ready to make the best financial decision when getting a car loan. Even if you aren’t ready to buy a car right now, it doesn’t hurt to be prepared. Start by acquiring a free copy of your credit summary.

It is always a good idea to pull your credit reports each year, so you can make sure they are as accurate as they should be. If you find any mistakes, be sure to dispute them with the proper credit bureau. Remember, each credit report may differ, so it is best to acquire all three.
If you want to know what your credit is before purchasing a car, you can check your three credit reports for free once a year. To track your credit more regularly,’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get a free credit score updated every 14 days.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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Student Loans: Which Repayment Plan is Right for You?

When I graduated from college *ahem* eons ago and it came time to pay off my federal student loans, I had no clue there were different options. I opted into the standard repayment plan because I didn’t know any better. Looking back, if I had been aware that there are quite a few different repayment options, I would’ve done my due diligence to see which was the best fit for my budget. 

I’d love to prevent you from making the same mistakes I made. Here’s how to go about gauging which student loan repayment is best for you: 

Research Your Options 

You’re placed in the standard 10-year repayment plan by default. However, this is typically the highest monthly payment plan. “So, before you fret about whether you can afford your student loans, look at what other payment options are available,” says Robert Farrington, founder of The College Investor. 

Here are the student repayment options to choose from: 

Standard Repayment Plan. The standard repayment plan is the most basic one. If you don’t choose a repayment plan, this is the one you’ll default into. You’ll be required to pay a fixed amount for 10 years. 

Graduated Repayment Plan. The payment structure is graduated. Your payments start lower at first and will increase every two years. You’ll be required to pay off your loans within 10 years. 

Extended Repayment Plan. Payments will be either fixed or graduated, and the amount will be lower than both the standard repayment plan and the graduated repayment plan. You’ll pay off your loans within 25 years. 

Revised Pay As You Earn Repayment Plan (REPAYE). Under REPAYE, the amount you owe each month will be 10 percent of your discretionary income. 

If your loans were for undergraduate studies, you’ll have 20 years to pay off your balance. If you took out any loans for graduate or professional studies, you’ll have 25 years to pay off your student debt. Any remaining balance after that time will be forgiven. 

With all income-based repayment plans, your monthly payments are recalculated each year. And how much you pay is dependent on the size of your family and your income. 

Pay As You Earn Repayment Plan (PAYE). With PAYE, you’ll pay 10 percent of your discretionary income. But it will never be more than what you’ll be paying if you opted for the standard repayment plan. To qualify for PAYE, you must be a new borrower on or after October 1, 2007. With PAYE, any outstanding loans will be forgiven after 20 years. 

Income-Based Repayment Plan (IBR). If you’re on an IBR plan, your monthly payments will be either 10 or 15 percent of your discretionary income. (Note: They’ll never be more than you would’ve paid under the 10-year standard repayment plan.) The balance on these loans will be forgiven after 20 or 25 years, depending on when you received your first loans. 

Income-Contingent Repayment Plan (ICR). On this income-based repayment plan, your payment would be either 20 percent of discretionary income or the amount you’d pay on a repayment plan with a fixed payment over 12 years, whichever is less.

Income-Sensitive Repayment Plan. Under this plan, your monthly payments are based on your annual income and can increase or decrease if your income changes. Your student loan balance will be paid off within 10 years. 

Know What You’re Eligible For

To narrow down your choices, figure out which repayment plans you’re eligible for. Some repayment plans are only available if you’ve taken out certain loans or if they’re over a certain amount. For the nitty-gritty details, you can check out the U.S. Department of Education’s Federal Student Aid website. 

There’s also Public Service Loan Forgiveness (PSLF), which is for those who are working in the government, serving in the military, or employed by non-profits. To be eligible for PSLF, you must be on an income-driven plan. 

Figure Out Which Plan Works Best for Your Budget 

The most important thing when it comes to repayment is whether you can keep up with payments. “The best repayment plan for you is the one that you can afford to make the payments on every month — without missing,” says Farrington. After all, this is a bill you could have to pay for the next 25 years. 

Because the standard repayment plan has higher monthly payments, an income-driven plan might be the best fit for your budget, explains Farrington. Income-driven plans — such as Income-Based Repayment, Pay As You Earn, and Revised Pay As You Earn — set your monthly payment at a percentage of your income. It’s either 10 percent or 15 percent of your discretionary income. “This can be helpful when you’re just starting, as your payments could legally be as low as $0 per month if your income is low enough,” says Farrington. 

On the flip side, lowering your monthly payments and stretching out the time it takes you to repay your student debt means you could be paying more in the long run. That’s because you’ll be paying more on the interest. 

If you’re not entirely sure which repayment plan is the right one for you, no need to fret. Just remember that you’re not tied down to a particular plan for the duration of the loan.

Your Repayment Plan Isn’t Set in Stone

Here’s the good news: you can change your repayment plan at any time. If you’re moving from a standard, extended, or graduated plan, you can move to an income-driven plan without any concerns, says Farrington. 

Don’t delay paying off your loans simply because you’re afraid of being locked into making the same payments every month for the next decade. Who knows what might change for you financially? “If budgeting is an issue, don’t defer your loans because you can’t pay,” Farrington adds. “Instead, switch to an income-driven plan and base it on your new income.” 

But if you’re already on an income-driven plan, and you decide to switch to a standard repayment plan, there is something you’ll want to take into consideration: any unpaid interest will capitalize on the loan.

Choosing a repayment plan for your student debt can feel disorienting. But by knowing the basic details, you can better gauge which repayment plan is the best fit for your budget. 

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