Looking for a new car or truck? You’re most likely also shopping for an auto loan. Borrowing money through a vehicle loan is a major financial decision that requires monthly payments for up to seven years, so it is important to do your homework.

In this guide to auto loans, we take a look at some of the most important things you should know about vehicle financing to help you make better decisions as you prepare to purchase your vehicle. Read on to learn more about this important step in your financial journey. 

How Do Car Loans Work?

Auto loans make it easier for you to buy a new car by allowing you to pay off the value of the vehicle in monthly installments, rather than a one-time cash payment. With a car loan, your financial institution or private lender pays for the purchase price of your vehicle on your behalf. You then pay back principal and interest over the term of your loan.

What Types of Auto Loans Can I Choose From?

Not all interest loans are the same. Depending on the type of vehicle you are buying and the type of transaction involved, you may make use of one of several different forms of lending. These include: 

  • New Car Loans: Financing for brand-new vehicles from a dealership.

  • Used Car Loans: Loans for pre-owned vehicles, generally with higher interest rates.

  • Refinancing Loans: Refinance your current loan with a new one that offers better terms.

  • Private Party Loans: Buying a car directly from another person instead of a dealer.

  • Lease Buyout Loans: Used to purchase a vehicle you’ve been leasing.

Where Can I Get an Auto Loan?

In most cases, you access your auto loan from one of two major sources: 

  • Direct lenders: Financial institutions like credit unions, banks, or online lenders often offer financing for vehicles. These lenders allow you to be pre-approved for a vehicle loan before you begin shopping, which can make buying your vehicle easier. 

  • Dealership financing: Many dealerships work with lenders to offer auto loans directly on-site. Through our partnership lending program, you can finance your auto loan with SCCU directly at select participating dealerships. This program combines the convenience of dealership financing with the benefits of our competitive rates and member-focused service.

It’s also possible to obtain loans from subprime lenders, especially if you have a poor credit score, but these loans carry very high interest rates and stringent terms. Approach these lenders with caution and be sure you cannot obtain more secure, affordable funding elsewhere.

Why Should I Get Pre-Approved Before Shopping?

Getting preapproved for funding before you set foot on a showroom floor can give you a big advantage when it comes to negotiating the price of your car with dealers. Having funding in your pocket ahead of time helps you stay within your budget and ensures you look at the total costs of your car loan over time, rather than the monthly payment promised by the dealer.

Having auto financing from a separate source also allows you to include optional protection products, like Guaranteed Asset Protection (GAP) and Mechanical Breakdown Protection (MBP), directly in your loan. These programs help protect you if your vehicle is damaged or totaled, ensuring you’re not left in debt, all while giving you access to SCCU’s exclusive rates and member benefits.

How Do Loan Terms Affect My Monthly Payment?

Your monthly payment is the amount you will need to set aside from your budget to repay the loan. You must be able to pay each month for the full term of your loan while meeting all your other financial obligations.

Your monthly loan amount is determined by three factors: 

  • Your total loan amount: The total amount you borrow will equal the value of the car you’re buying, less any down payment you can make. The greater the amount of money you can put down in cash at the time of purchase, or offset by trading in an existing vehicle, the less money you will need to borrow. 

  • Your annual percentage rate (APR): This is the effective interest rate you will end up paying on your loan. Your lender will determine your interest rate based on your credit score and other indicators of your financial health.

  • Your loan term: Most auto loans require you to pay back what you owe plus interest within five years, but some lenders offer terms of seven years or longer. A longer-term loan will cost less each month, but more in interest over the lifespan of the loan. A shorter-term loan also means you’ll own your car outright sooner.

Let’s take a look at an example of how your loan term affects the total cost of your financing. Let’s say you’re borrowing $25,000 at a 6% APR. 

  • On a 5-year loan, your monthly payment would be about $483, and you’d pay around $3,980 in interest over the life of the loan.

  • On a 7-year loan, your monthly payment would drop to about $365, but you’d pay approximately $6,670 in interest over the term.

Choosing a shorter term saves you money in the long run, even if your monthly payments are higher.

What Is APR and Why Does It Matter?

You’ll notice lenders use APR, or Annual Percentage Rate, to refer to the interest rate you will pay on your loan. APR reflects the full yearly cost of borrowing, including both your interest rate and any fees rolled into the loan. 

APR allows you to compare loan offers more accurately than just looking at interest rates alone. A difference of just a few 10ths of a percent can end up saving or costing you hundreds or even thousands of dollars over the life of your auto loan.

What Determines the Interest Rate on My Auto Loan?

What factors go into determining the APR or interest rate you are offered? Your rate is determined by both personal and vehicle-related factors:

  • Credit score: Higher scores generally qualify you for lower rates.

  • Debt-to-income ratio: Lenders want to be sure you can take on new debt. They typically look for a ratio below 45% for the best rates. 

  • Loan-to-value ratio: How does your car loan compare to the actual value of your vehicle? Borrowing close to 100% of your vehicle’s value can increase your rate.

  • Vehicle age and condition: Older vehicles may trigger higher rates.

  • Loan term: Longer terms generally carry higher rates.

How Can I Lower My Interest Rate or Monthly Payment?

The interest rate on your auto loan will affect both your monthly payments and the interest you pay on your loan, so it’s important to score the lowest rate possible. Here are some tips for getting the best rates on your loan:

  • Shop around for a lender: Obtain quotes from 3-4 lenders and choose the one that offers the lowest interest rate or best terms

  • Boost your credit score: Improve your credit score before applying. Be sure to pay credit card bills on time and pay down outstanding balances. Refrain from opening any new cards. Obtain and check your credit reports for fraud and inaccuracies.

  • Borrow less than you qualify for: Consider borrowing less than the total amount for which you prequalify. Borrowing less generally means you pay a lower interest rate.

  • Save up for a bigger down payment. If you don’t have money for a down payment of at least 10% you may want to delay your auto loan application until you can save more.

What Additional Costs Should I Expect With an Auto Loan?

Beyond the vehicle price and interest, you may need to budget for the following costs, some of which are rolled into your loan payments and will affect your APR:

  • Sales tax 

  • Title and registration fees 

  • Dealer documentation fees

  • Add-ons like extended warranties or maintenance packages

  • GAP insurance to cover the difference between your vehicle’s value and any insurance payout in the event your car is totaled

What Mistakes Should I Avoid When Taking Out an Auto Loan?

  • Financing too long: A longer term may mean lower monthly payments, but will also increase the interest you pay over the life of your loan.

  • Not comparing lenders: Rates and terms vary significantly. Don’t take your first offer.

  • Focusing on the monthly payment: A low monthly payment can mean paying more interest over the life of your loan. 

  • Ignoring the total cost: Look at the full repayment amount, not just the car price.

Why Should I Work With a Credit Union for My Auto Loan?

Credit unions are often your best choice for car loans. Smaller than most commercial banks, they’re known for providing more personal service and taking your circumstances into account when deciding on loans, rather than just looking at your credit score and other figures.

In addition, credit unions also generally provide better rates on auto loans than banks. This is because credit unions are owned by members, rather than outside shareholders. With no dividend targets to meet, credit unions are free to return more of their earnings to their members in the form of fewer fees and better rates.

Trust SCCU to Get You Rolling! 

Shopping for a car is always exciting, and you can’t wait to get behind the wheel of your new vehicle. However, it’s important to do your research before signing for a loan. 

At Scenic Community Credit Union, we’re focused on taking care of our members and getting you moving for less. Applying for an auto loan with SCCU is simple, quick, and easy. Click below to apply for an auto loan or learn more about our car financing options.


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