Car loans
The car business is built on information asymmetry. Level the playing field before you walk into a dealership.
Core concepts
New vs Used Rates
New cars get lower rates (4-7%) because they're less risky for lenders. Used cars have higher rates (5-10%+) due to depreciation and uncertainty. Age and mileage matter.
Dealer vs Direct Financing
Dealers mark up rates for profit. Getting pre-approved from a bank or credit union gives you negotiating power and often better rates.
Loan Term Trade-offs
Longer terms (72-84 months) mean lower payments but more interest and risk of being underwater. Shorter terms (36-48 months) cost less total.
GAP Insurance
Covers the gap between what you owe and what insurance pays if totaled. Important for new cars with low down payments. Often cheaper from insurers than dealers.
Dealer tricks to watch for
Focusing on monthly payment
Dealers stretch terms to hit your target payment while increasing total cost. Always negotiate on total price first.
Rate markup
Dealers can add 1-3% to your approved rate and keep the difference. Come pre-approved to avoid this.
Packing
Adding products to your payment without clear disclosure. Scrutinize every line item before signing.
Yo-yo financing
Letting you drive off, then calling to say financing fell through at the original terms. Get final approval before leaving.
Example rate ranges
Rates vary by credit, lender, and market conditions. These are typical ranges to help you evaluate offers.
| Scenario | Typical APR | Note |
|---|---|---|
| New car (excellent credit) | 4.0-6.0% | Credit union rates often beat dealer financing |
| New car (good credit) | 5.5-8.0% | Shop around. Manufacturer specials may apply. |
| Used car (2-3 years old) | 5.5-9.0% | Rates rise with vehicle age. Certified pre-owned may help. |
| Used car (5+ years old) | 7.0-12.0%+ | Many lenders won't finance older vehicles. Credit unions more flexible. |
Before visiting the dealership
Tools for car buyers
Run the numbers before you negotiate.
Car Loan FAQs
Absolutely. Pre-approval gives you a baseline rate, negotiating power, and protection from dealer markup. You can still let the dealer try to beat your rate.
As short as you can afford. 48-60 months is reasonable. 72+ months means paying interest long after the car depreciates. Never go longer than the expected ownership period.
At least 10%, ideally 20%. Less than 10% risks being underwater immediately. New cars lose 20%+ value in year one. Your loan shouldn't exceed the car's value.
Buy if: you drive a lot, keep cars long, want to build equity. Lease if: you want lower payments, drive under limits, always want new cars. I think buying usually wins financially.