Nothing is more exciting than getting a new car and few things are as overwhelming as applying for auto financing. If you apply for more than you can afford, for example, you risk getting turned down, paying for the next 60 months more than you have to give or, even worse, defaulting on the loan and ruining your credit.

The truth is most people can get a car loan but not all loans are created equal. Like most things, there is a right and a wrong way to go about financing a car. 

What is the smartest way to auto finance?

Understanding How Financing A Car Works

Perhaps one of the first things you should do as you learn about car finance options is to determine what kind and how much of a vehicle you can afford.

Most experts recommend you spend no more than 10% of your income on a car payment. 

Next, determine your current credit score. The better the score the less interest you pay. Rates fluctuate and vary from lender to lender. How much you make a year, the length of the loan and how much you put down may factor into the rate, as well.

On average car finance rates are as follows: 

  • 500 to 589 = 15.24 percent interest rate 
  • 590 to 619 = 14.06 percent interest rate
  • 620 to 659 = 9.72 percent interest rate
  • 660 to 689 = 7.02 percent interest rate
  • 720 to 850 = 3.60 percent interest rate

You will also want to calculate the affordability of potential auto loans

If you can pay $300 per month and get a 60-month loan at 7.55%, you can afford a car that costs around $15,000 plus your down payment and before title and tax.

That number will go up or down depending on the length of the loan. 

For example, if you are willing to pay on the loan for six years instead of five, you can afford a car that costs just over $17,000 but you will pay an additional year of interest. One year can end up costing you another thousand dollars or more if you have a high-interest rate loan.

In many cases, the interest rate may go up if you extend the terms of the loan, as well. If the interest rate is 7.55% at 60 months (five years), it might be 7.75% at 72 months (six years).

Tips For Getting The Best Car Finance Options  

There are ways to ensure you get the best auto finance possible--and at the right time.

Consider Your Credit Score & Credit Report

A credit score above 700 will typically mean you’ll have an easy time getting auto financing. That’s because your credit score represents how likely you are to pay off your loan. 

If your credit score is low and you can wait, take steps to improve it before you buy a new car. Look for ways to build your credit like making on-time payments and paying the balance in full each month. 

The difference between a fair score and a good one is thousands of dollars in interest.

In addition to your credit score, you’ll also have a credit report, which details all the items that are factored into your current score. Every person is entitled to a free copy of their credit report each year from the three major credit reporting agencies.

Take a careful look at your credit report and fix any errors before applying for an auto loan. 

Down Payment

If you currently have any savings, you might want to put a portion toward a down payment on your vehicle. That will reduce the total financing you’ll need and could ultimately mean more favorable loan terms. Typically, a down payment of about 20% is best.

Take the time to save a decent down payment. The more you put down the better. It will not only improve your options for getting a low-interest loan, but it will reduce the amount you pay over the life of the loan. 

Get Pre-Qualified

A dealer is more likely to negotiate the sale price if you already have financing. 

Even if the pre-qualified loan is more than you want to pay in interest, it’s worth having before you shop. It gives the dealer a chance to get you better financing, too.

Shop Around For The Best Rates

As you determine what rates you might qualify for, it may be tempting to get as long a loan term as possible. However, you’ll want to keep it as short as you can afford because the longer the loan, the more interest will accrue. 

Also, many lending institutions will charge more interest on longer loan terms since they represent a higher risk. These two factors together mean you could easily end up paying hundreds or thousands more on interest if you have a longer loan term.

Start at your local credit union. Community-focused, member-centric financial institutions offer some of the most competitive car finance rates and flexible terms you’ll find.

Plan For Extra Costs

On top of the base price of the vehicle and the interest that will accrue, you’ll want to plan on additional costs, including the following:

Fees and extras

Auto sales involve various fees, such as documentation fees, registration fees, etc. It’s best to avoid covering those with your loan since it increases the amount you borrow beyond the actual value of your vehicle. If possible, pay for those costs yourself.


Sales taxes are a constant in most states. As with fees and extras, you’ll want to cover those yourself instead of rolling them into your auto financing.

Gap insurance

Gap insurance—“gap” standing for “guaranteed auto protection”—covers the difference between what you owe on a car and how much it’s worth. It can be well worth getting to avoid liabilities from being upside down in the loan.

Think Big Picture 

Often people figure out how much they can pay each month on a vehicle and stop there. They respond to TV ads that say you can get this or that car for just 200 dollars a month. If all you see is the monthly payment, then you don’t know what you are paying for the car or how high the interest rate is for the loan.

Look at all aspects of auto finance, and break it down by:

  • Cost of the car
  • Interest rate
  • Loan term
  • Monthly payment

Making Wise Auto Finance Decisions

When it comes to putting your hard-earned money towards a major purchase, like a car, it’s always best to go in well-informed. 

At Chartway FCU, our representatives are here to answer all of your questions about how financing a car works and guide you towards finding the most competitive auto loan interest rates and competitive terms. 

Find more information about car financing in these resources: