Compare Auto Loan Options

Key facts about comparing auto loans

When you compare auto loans, the annual percentage rate (APR) is the most important number. The APR includes the interest rate plus certain fees, so it gives a more complete picture of the cost of borrowing than the interest rate alone.

The length of the loan, or term, also matters. A longer term lowers the monthly payment but increases the total interest paid over the life of the loan. A shorter term has a higher monthly payment but costs less in total interest.

For a $20,000 loan at 4.75% APR, a 36-month term would cost about $1,498 in total interest, while a 72-month term would cost about $3,024. This example from the Consumer Financial Protection Bureau illustrates the trade-off between term and total cost.

• APR includes fees and is the broader cost measure.
• Longer terms reduce monthly payments but raise total interest.
• Shorter terms increase monthly payments but lower total interest.

Sources: Consumer Financial Protection Bureau, Space Coast Credit Union, Crossroads Cars, Monster Motors, Community First Credit Union

Lender types overview

Auto loans can be arranged through different types of lenders. The three main categories are banks, credit unions, and dealerships. Each has its own characteristics in terms of rates, convenience, and cost.

Dealer-arranged financing is convenient because you can arrange the loan at the dealership in one visit. However, the dealer typically adds a markup over the lender's buy rate, which can make the interest rate higher.

Banks and credit unions offer direct financing, which means you get a loan directly from the financial institution rather than through the dealership. This often results in lower interest rates because there is no dealer markup. Credit unions, in particular, are often noted for offering lower rates than banks, sometimes by a full percentage point or more, although this can vary.

• Dealer financing: convenient but may include a markup.
• Bank financing: direct, may offer competitive rates.
• Credit union financing: often lower rates, but membership may be required.

Sources: Consumer Financial Protection Bureau, Wright-Patt Credit Union

Comparison criteria

When comparing auto loan offers, focus on the APR, the loan term, the monthly payment, and the total interest cost. The APR tells you the cost of credit, and the term affects how much you pay each month and in total.

Also consider the loan term's impact on risk. Longer terms often carry higher interest rates because lenders view them as riskier. Financial experts commonly recommend loan terms of five years or less to avoid negative equity.

Be aware that shopping for an auto loan within a 14 to 45-day period counts as one credit inquiry and will not impact your credit score more than a single inquiry. This allows you to compare offers from different lenders without worrying about multiple inquiries hurting your score.

• Compare APRs, not just interest rates.
• Compare monthly payments and total interest for different terms.
• Consider the loan term's effect on the interest rate and risk.
• Use the 14-45 day shopping window to compare offers without credit score damage.

Sources: Consumer Financial Protection Bureau, Space Coast Credit Union, Crossroads Cars

New vs used summary

When comparing auto loans, the vehicle's age can influence the loan terms available. New cars may qualify for promotional financing or lower rates, but the specifics depend on current market conditions and individual lender offers.

For used cars, rates may vary based on the vehicle's age and value. While exact rate comparisons are not available, the key is to compare the APR, term, and total interest on any offer you receive, regardless of whether the car is new or used.

Focus on the loan structure and your financial situation rather than assuming a new car always gets a better deal.

• New cars may have different rate offers than used cars.
• Used car rates are Details vary, so compare APRs directly.
• Consider the vehicle's age and value when evaluating loan offers.

Sources: Consumer Financial Protection Bureau

Short vs long term

The term of your auto loan has a major impact on your finances. Short-term loans (typically 24-48 months) have higher monthly payments but lower total interest costs. Long-term loans (typically 60-84 months) have lower monthly payments but higher total interest costs.

Longer loan terms are often associated with higher interest rates because lenders consider them riskier. This means you not only pay interest for a longer period, but you also pay a higher rate.

Consider the CFPB example: a $20,000 loan at 4.75% APR costs about $1,498 in interest over 36 months, but about $3,024 over 72 months—more than double.

• Short-term: higher payment, lower interest total.
• Long-term: lower payment, higher interest total.
• Longer terms often have higher rates.

Sources: Consumer Financial Protection Bureau, Space Coast Credit Union, Crossroads Cars, Monster Motors, Community First Credit Union

Comparing offers

When you have auto loan offers from different sources, compare them side by side. Look at the APR, the loan term, the monthly payment, and the total cost over the life of the loan. A lower monthly payment might seem attractive, but it can cost you more in interest over time.

Use the CFPB's example to illustrate: a longer term reduces the monthly payment but increases total interest. So, don't focus solely on the monthly payment; consider the total cost.

Also, be aware that dealer-arranged financing often includes a markup over the buy rate, so the APR may be higher than what you could get from a direct lender.

• Get quotes from multiple lenders.
• Compare APRs and loan terms.
• Calculate total interest for each offer.
• Watch for dealer markups in dealer-arranged financing.

Sources: Consumer Financial Protection Bureau

Decision framework

Use a simple decision framework when choosing an auto loan. Start with the APR: lower is better. Then consider the loan term: shorter terms cost less in total interest but have higher monthly payments. Balance that against your budget.

Consider your long-term financial goals. If you want to keep your monthly payments low, a longer term may be tempting, but it will cost more in interest and may increase the risk of negative equity. Financial experts often recommend terms of five years or less to avoid negative equity.

Ultimately, the best loan is the one that fits your budget and minimizes total cost. That usually means the shortest term you can afford with the lowest APR.

• Choose the lowest APR you can get.
• Pick the shortest term you can afford.
• Use the CFPB's example to estimate total interest.
• Avoid negative equity by keeping terms under five years if possible.

Sources: Consumer Financial Protection Bureau

Example scenarios

Consider two scenarios for a $20,000 loan at 4.75% APR. With a 36-month term, your monthly payment would be higher, but you'd pay about $1,498 in total interest. With a 72-month term, your monthly payment would be lower, but you'd pay about $3,024 in total interest.

This example shows how the term affects your costs. If you can afford the higher monthly payment, the 36-month loan saves you over $1,500 in interest.

Keep in mind that this example assumes a fixed APR and no other fees. Actual offers may differ.

Sources: Consumer Financial Protection Bureau

decision-criteria matrix

The following table summarizes typical differences between lender types and loan terms. It is based on the criteria most relevant to comparing auto loans.

Sources: Consumer Financial Protection Bureau, Wright-Patt Credit Union, Space Coast Credit Union, Crossroads Cars, Monster Motors, Community First Credit Union