2. Keep the Loan Term as Short as Possible
Dealerships love to sell cars based on the monthly payment. They will often suggest extending your loan to 72 or even 84 months to make an expensive car fit your monthly budget. This is a massive financial trap.
The longer the loan term, the higher the interest rate banks will charge you. Furthermore, cars are depreciating assets. If you take out an 84-month loan, you will likely end up “underwater”—meaning you owe more on the loan than the car is actually worth—for years.
The Rule of Thumb
Financial experts recommend the 20/4/10 rule: Put down a 20% down payment, finance the car for no more than 4 years (48 months), and ensure your total car expenses (including insurance and gas) do not exceed 10% of your gross monthly income. By keeping the term at 48 or 60 months maximum, you qualify for the most competitive interest rates available.
3. Polish Your Credit Score Before Applying
Ultimately, your auto loan rate is tied directly to your FICO score. Borrowers with excellent credit (above 760) are offered the prime, advertised rates, while those with fair or poor credit pay significantly more in interest over the life of the loan.
Take 30 to 60 days before applying to check your credit reports for errors, pay down high credit card balances, and avoid applying for any other types of credit. A jump of just 20 points in your credit score can save you thousands of dollars in interest charges on your new vehicle.