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Comparing Written Auto-Loan Offers and the Total Vehicle Budget

This guide presents selected U.S. government consumer education from CFPB. References to “we” or “us” in the source material refer to the issuing agency. Source dates and links appear below.

How do I compare auto loan offers?

When comparing auto loan offers, look at the annual percentage rate, the interest rate, the length of the loan, and the total amount financed.

When you’re shopping for any loan, it’s important to look at several options so you can compare offers and find the one that’s best for you.

It’s common to focus on the monthly payment, but there are other factors that have more impact on the total costs you’ll pay over the life of your loan. For example, a longer loan term may mean smaller monthly payments, but you’ll ultimately pay more in interest over the life of the loan.

To get a more complete picture, it’s best to compare your offers by looking at:

Learn what things you can negotiate

Understanding the impact of the length of your loan on your total costs

Below is a sample comparison to illustrate how the length of a loan term can impact your monthly payment as well as the total costs you’ll pay. The table uses an example of a $20,000 loan with an interest rate of 4.75%.

Loan Term Monthly Payment Total Interest Paid
36 months (3 years) $597 $1,498
48 months (4 years) $458 $1,999
60 months (5 years) $375 $2,508
72 months (6 years) $320 $3,024

While the longer loan term gives you a lower monthly payment, consider the total cost you’ll pay over the full term of your loan. If you pay off a $20,000 loan in three years, you’ll pay $1,498 in interest. For a six-year loan, however, you will pay $3,024 in interest—more than twice as much.

Some financial experts recommend that your auto loan be five years or less. Longer loans are more likely to result in your owing more than the vehicle is worth.

When you think about your auto loan, it is also important to think about the total cost of ownership. Consider the costs that could be higher for a new vehicle than for an older one, such as taxes and insurance. Other costs will include annual registration fees, maintenance, auto insurance, gas, and repairs.

Use our auto loan worksheet to calculate your potential costs and how much you can afford

See different ways to get an auto loan

You have several options to consider when buying a new car or getting an auto loan. Learn how they can affect your overall money picture.

Read more about the ways to finance your loan

How much can I afford to borrow for a car or auto loan?

Figuring out how much you need to borrow for an auto loan starts with weighing all the potential costs associated with car ownership and how much you can comfortably afford.

When shopping for a car, it’s tempting to calculate your monthly payment based on the list price of the vehicle. However, this doesn’t take into consideration the other factors that impact your overall loan amount and monthly payment. There are also the longer-term costs of owning and operating a vehicle, such as regular maintenance, gas, and car insurance.

Start calculating the potential costs

To find the true cost of a car or vehicle, add together the up-front cost of the car and features plus monthly expenses, such as interest, insurance, and routine maintenance. Then, subtract factors that may reduce how much you need to borrow, including a trade-in or down payment.

Up-front costs that could add to your total loan amount:

Factors that could reduce the overall cost of your loan:

Other factors that influence how much you’ll pay over the life of your loan:

  • Interest rate
  • Length of the loan

Another important way to reduce your overall costs is to shop around with different lenders so you can compare interest rates and loan terms, which could save you thousands of dollars over the life of your loan.

Use this worksheet to help calculate and compare costs for your new car

Create a monthly spending plan

Next, you want to have a sense for your budget – how much is coming in and going out every month – to figure out how much you can comfortably afford. If you’re not sure how to create your own budget, you can get help from a nonprofit financial counselor.

Monthly expenses generally include:

  • Housing expenses, including utilities
  • Food expenses
  • Transportation costs
  • Personal and family costs

Monthly income includes:

  • Salary paychecks
  • Any other income sources, including child support

Download our budgeting worksheet

Know before you shop

There are several important financial decisions to make before you shop for a car. Learn what questions to ask so you can make the best choice for you.

What you need to know before you shop for a car or auto loan

What factors into the price of a car or vehicle?

Manufacturers set a base price for a car or vehicle without add-on products or features. The Manufacturer Suggested Retail Price (MSRP) is the base price plus additional features. Keep in mind that there are other costs and fees will factor into the total cost of your vehicle.

The manufacturer’s base price is the cost of a vehicle without optional features, such as a sunroof, and add-on products, such as extended warranties or service contracts. The Manufacturer Suggested Retail Price (MSRP) is the price that the manufacturer suggests the dealer offer it for, with recommended options and features included. While these numbers are informative, many experts suggest the dealers invoice price is a better place to begin negotiations.

Manufacturers might offer special incentives to dealers and consumers on certain vehicles, such as cash rebates or 0% APR financing, especially if they have a large inventory that they’re needing to sell. With these promotions, check the fine print to see whether you qualify. Promotional interest rates are often limited to people with high credit scores or to loans with shorter terms.

While it’s tempting to calculate your monthly payment on the advertised price, other costs and fees ultimately make up the price you pay for the car, as well as what you pay over the life of your loan. For example, the interest rate and optional add-on products add to the amount you’ll need to borrow to purchase the vehicle, while insurance, maintenance, and gas factor into the longer term costs of owning a car.

You can also negotiate certain costs, such as the price of the vehicle, interest rate, and trade-in. To find the deal that’s right for you and your budget, make sure to shop around with multiple dealers and lenders.

Know before you shop for a car or auto loan

Save yourself valuable time, money, and stress by asking these questions before you shop for a car or auto loan.

Where can I get information on auto loan rates?

You can get car or auto loan rates at banks, credit unions, auto dealers, and certain commercial websites. We recommend getting financing offers before you visit the dealer to get the best rates and terms.

Most lenders will publish estimated interest rates online, but you’ll need to either apply or pre-apply for a loan to get a precise quote based on your personal financial situation. Certain commercial sites may also give you estimated interest rates, but be aware that they may link you to specific lenders and dealers in your area, so be careful if they ask for your personal information.

Lenders associated with car manufacturers may also offer special interest rate deals for consumers with higher credit scores, but these loans are only available through the auto dealers.

How can I get the best rates and terms for my auto loan?

There are multiple ways to get an auto loan, including going through a bank, credit union, or the dealer. Keep in mind that interest rates through dealers are generally higher because their rates often add additional interest to compensate them for handling your financing. Regardless of the source, interest rates are negotiable.

Getting multiple interest rate quotes can negatively impact on your credit score(s). For most people, the cost savings shopping can outweigh any negative effect. You can also minimize any impact by getting rate quotes between 14 and 45 days.

Learn more about different ways to buy or finance a car or vehicle

Sources and publication details

The federal agency source text is U.S. government work in the public domain. Fynoptic selected, adapted, and formatted it for this guide. No agency endorsement is implied. Follow the linked sources for current program details and the rules applicable to your circumstances.

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