5 Questions to Ask When Getting a Car Loan

Wise car buyers research cars thoroughly and strive to choose a safe, reliable vehicle at a great price. When it comes to picking a car loan, the same kind of scrutiny should be applied to make sure you’re getting the best financing deal. Here are five questions you should ask when shopping for a car loan. 

1. What will my interest rate be?

This is question No. 1 for a reason. The interest rate, or annual percentage rate (APR), determines how much interest you will pay on your loan. Your APR will mostly be determined by your credit score, so the better your credit score, the lower the interest rate may be. And the lower your APR, the less you’ll pay in interest over the life of the loan. When looking for a car loan, make sure to get multiple quotes and, all else being equal, look for the lowest APR.

2. How much will my down payment be?

Each lender’s down payment requirements vary but will generally be based on how much you’re financing and your credit score. The lower your credit score, the more likely you’re going to need a down payment. This is especially true if you shop for a loan with subprime lenders, who work with credit-challenged borrowers. Subprime lenders may require a down payment of at least $1,000 or 10% of the vehicle’s selling price.

Borrowers with good credit may not need a down payment, but making a down payment may be to your advantage because you’ll:

• Lower the amount being financed.
• Reduce the interest charges.
• Enjoy a lower your monthly payment.

Use a loan calculator to see how many hundreds of dollars you could save by making a solid down payment.

3. What’s the value of my trade-in?

If you’ve ever traded in a vehicle, you know the routine: you want as much as possible for your trade-in, but the dealer will offer as little as possible. As a result, you negotiate the value of your trade-in. Research your car’s value ahead of time to strengthen your negotiating stance and show the dealer why your trade-in is worth the price you’re asking.

You could also take your trade-in to a mechanic for an inspection, and if the mechanic gives your trade-in a clean bill of health, this information could also strengthen your negotiating position. And remember, a trade-in is just like a down payment in that it will lower the amount being financed, the interest charges and your monthly payment. Do everything you can to get top dollar for your trade-in!

4. Can I pay the loan off early?

In most cases, you can pay off your loan early without penalty. However, some loans come with pre-payment penalties. Make sure to ask your lender or finance manager if any such penalties will apply to your loan. Also, depending on where you are in your financial journey, paying off your loan early might affect your credit score.

5. What does the extended warranty cover?

Many car buyers consider buying an extended warranty for their car. Whether you need one depends on several factors, such as:

• Is the car still covered by the original manufacturer’s warranty?
• Does the make and model of your car have a great record for reliability?
• Will the amount of warranty coverage you receive be worth the price?

As you compare warranties, be sure to read the contract carefully and ask for clarification on anything you don’t understand. Learn more about extended warranties.