Not all car loans are created equal. When applying for a loan and reviewing your options, make sure that you find the best loan available. In doing so, there are five factors you want to consider when completing the process.
Boost Auto Loan Rates with a Strong Credit Score
When securing an auto loan, your credit score plays a major role in determining how much you’ll pay in interest over time. In fact, it’s the most important factor lenders consider when calculating your annual percentage rate (APR), which is the true cost of borrowing. A higher credit score often means significantly lower interest rates, with borrowers boasting scores of 780 or above typically qualifying for the best deals available. Even a modest bump in your score can translate into big savings over the life of your loan.
Before you apply, it’s smart to review your credit report for any errors that could drag your score down. With Credit Score in the Belco Money Manager App, you have access to your credit score, full credit report, and credit monitoring. If your score isn’t where you’d like it to be, you can improve it by paying off outstanding debts, making payments on time, and avoiding new debt unnecessarily. A little credit cleanup now could mean more money in your pocket later.
Understand APR to Reveal the True Cost of Your Loan
When shopping for an auto loan, it’s easy to get fixated on the monthly payment. However, that number doesn’t tell the whole story. While stretching your loan over a longer term (such as 72 or even 84 months) can make your monthly payments more affordable, it also means you’ll pay far more in interest over time. This extended repayment period can also increase the risk of becoming “upside down” on your loan, meaning you’ll owe more than the car is worth.
To understand the true cost of your loan, pay attention to the annual percentage rate (APR), not just the interest rate. The APR reflects not only the interest but also additional fees, giving you a more complete picture of what the loan will actually cost. Looking at the full picture beyond just the monthly payment can help you make a smarter, more cost-effective decision.
Save More with a Bigger Down Payment
A larger down payment is one of the smartest moves you can make when financing a car. By putting more money down upfront, you reduce the total loan amount, which means you’ll pay less interest over the life of the loan and enjoy lower monthly payments. Another way to boost your down payment is by trading in your current vehicle. If you own it outright or have positive equity (your car is worth more than what you owe), that trade-in value can go directly toward your new purchase.
Lenders also view a substantial down payment as a sign that you’re financially responsible and invested in the deal. This personal investment often makes them more willing to offer you a better interest rate, helping you save even more in the long run. Starting strong with a solid down payment is a simple but powerful way to make your auto loan more affordable.
Compare Lenders to Get Better Deals
Where you get your auto loan can make a big difference in the interest rate and overall terms you receive. Instead of accepting the first offer you get at a dealership, take the time to explore multiple lenders, such as banks, credit unions, and online lenders. Shopping around not only helps you compare rates but also gives you a clearer sense of what’s available in the market.
One smart strategy is to get pre-approved for a loan before stepping foot in the dealership. This gives you stronger negotiating power and can help you secure a lower interest rate. Don’t overlook credit unions, either. Because they operate as not-for-profit financial cooperatives, they often offer more competitive rates and more flexible terms than traditional commercial banks.
Manage Your Debt-to-Income Ratio
Your debt-to-income (DTI) ratio (how much of your monthly gross income goes toward paying debts) is a key factor lenders use to evaluate your loan application. A low DTI ratio signals that you manage your finances responsibly and have the capacity to handle additional loan payments without strain.
Generally, the lower your ratio, the better your chances of getting approved and qualifying for favorable loan terms. It’s important to understand how a new car payment will impact your overall budget. As a practical guideline, aim to keep all car-related expenses—including insurance, gas, and maintenance—below 20% of your take-home pay to maintain a healthy balance. This approach can help ensure your new loan fits comfortably within your financial means.
Drive Toward a Smart Financial Decision
Applying for an auto loan is about more than just finding the lowest monthly payment. By strengthening your credit score, understanding how APR affects your total cost, saving for a larger down payment, comparing lenders, and keeping your DTI ratio in check, you’ll be in a much better position to secure a loan that fits your budget. A little preparation now can help you drive off with a loan that works for both your car and your wallet.