Shopping for an auto loan may not be as exciting as shopping for a car, but if you calculate car payments before you visit the dealership, you may end up saving money. Use our auto loan calculator to estimate monthly car payments and find the lowest rates available. Then you can shop for the vehicle that fits your budget and negotiate the best deal. The Auto Loan Calculator is mainly intended for car purchases within the U.S. People outside the U.S. may still use the calculator, but please adjust accordingly. If only the monthly payment for any auto loan is given, use the Monthly Payments tab (reverse auto loan) to calculate the actual vehicle purchase price and other auto loan information.
Most people turn to auto loans during vehicle purchase. They work as any generic, secured loan from a financial institution does with a typical term of 36 or 60 months. Each month, repayment of principal and interest must be made from borrowers to auto loan lenders. Money borrowed from a lender that isn’t paid back can result in the car being legally repossessed.
Dealership Financing vs. Direct Lending
Generally, there are two main financing options available when it comes to auto loans: direct lending or dealership financing. With the former, it comes in the form of a typical loan originating from a bank, credit union, or financial institution. Once a contract has been entered with a car dealer to buy a vehicle, the loan is used from the direct lender to pay for the new car. Dealership financing is somewhat similar except that the auto loan, and thus paperwork, is initiated and completed through the dealership instead. Auto loans via dealers are usually serviced by captive lenders that are often associated with each car make. The contract is retained by the dealer, but is often sold to a bank or other financial institution called an assignee that ultimately services the loan.
Direct lending provides more leverage for buyers to walk into a car dealer with most of the financing done on their terms, as it places further stress on the car dealer to compete with a better rate. Getting pre-approved doesn’t tie car buyers down to any one dealership, and their propensity to simply walk away is much higher. With dealer financing, the potential car buyer has fewer choices when it comes to rate shopping, though it’s there for convenience for anyone who doesn’t want to spend time shopping, or cannot get an auto loan through direct lending.
Often, to promote auto sales, car manufacturers offer good financing deals via dealers. Consumers in the market for a new car should start their search for financing with car manufacturers. It is not rare to get low interest rates like 0%, 0.9%, 1.9%, or 2.9% from car manufacturers.
Car manufacturers may offer vehicle rebates to further incentivize buyers. Depending on the state, the rebate may or may not be taxed accordingly. For example, purchasing a vehicle at $30,000 with a cash rebate of $2,000 will have sales tax calculated based on the original price of $30,000, not $28,000. Luckily, a good portion of states do not do this and don’t tax cash rebates. They are Alaska, Arizona, Delaware, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Missouri, Montana, Nebraska, New Hampshire, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Utah, Vermont, and Wyoming.
Generally, rebates are only offered for new cars because of how uniform and consistent each new car is. While some used car dealers do offer cash rebates, this is rare due to the difficulty involved in determining the true value of the vehicle.
A car purchase comes with costs other than the purchase price, the majority of which are fees that can normally be rolled into the financing of the auto loan or paid upfront. However, car buyers with low credit scores might be forced into paying fees upfront. The following is a list of common fees associated with car purchases in the US.
- Sales Tax—Most states in the US collect sales tax for auto purchases. It is possible to finance the cost of sales tax with the price of the car, depending on the state the car was purchased in. Alaska, Delaware, Montana, New Hampshire, and Oregon are the five states that don’t charge sales tax.
- Document Fees—This is a fee collected by the dealer for processing documents like title and registration. Typically, they run between $150 and $300.
- Title and Registration Fees—This is the fee collected by states for vehicle title and registration. Most states charge less than $300 for title and registration.
- Advertising Fees—This is a fee that the regional dealer pays for promoting the manufacturer’s automobile in the dealer’s area. If not charged separately, advertising fees are included in the auto price. A typical price tag for this fee is a few hundred dollars.
- Destination Fee—This is a fee that covers the shipment of the vehicle from the plant to the dealer’s office. This fee is usually between $600 and $1,000.
- Insurance—In the U.S., auto insurance is strictly mandatory to be regarded as a legal driver on public roads and is usually required before dealers can process paperwork. When a car is purchased via loan and not cash, full coverage insurance is mandatory. Auto insurance can possibly run more than $1,000 a year for full coverage. Most auto dealers can provide short-term (1 or 2 months) insurance for paper work processing so new car owners can deal with proper insurance later.
If the fees are bundled into the auto loan, remember to check the box ‘Include All Fees in Loan’ in the calculator. If they are paid upfront instead, leave it unchecked. Should an auto dealer package any mysterious special charges into a car purchase, it would be wise to demand justification and thorough explanations for their inclusion.
Auto Loan Strategies
Probably the most important strategy to get the best auto loan possible is to be well-prepared. This means determining what is affordable before heading to a dealership first. Knowing what kind of vehicle is desired will make it easier to research and find the best deals to suit your individual needs. Once a particular make and model is chosen, it is generally useful to have some typical going rates in mind to enable effective negotiations with a car salesman. This includes talking to more than one lender and getting quotes from several different places. Car dealers, like many businesses, want to make as much money as possible from a sale, but often, given enough negotiation, are willing to sell a car for significantly less than the price they initially offer. Getting a preapproval for an auto loan through direct lending can aid negotiations.
Credit, and to a lesser extent, income, generally determines approval for auto loans, whether through dealership financing or direct lending. In addition, borrowers with excellent credit will most likely receive lower interest rates, which will result in paying less for a car overall. Borrowers can improve their chances to negotiate the best deals by taking steps towards achieving better credit scores before taking out a loan to purchase a car.
Paying off an auto loan earlier than usual not only shortens the length of the loan, but can also result in interest savings. However, some lenders have early payoff penalty or terms restricting early payoff. It is important to examine the details carefully before signing an auto loan contract.
Buying a Car with Cash Instead
Although most car purchases are done with auto loans there are benefits to buying a car outright with cash.
- Avoid Monthly Payments—Paying with cash relinquishes a person of the responsibility of making monthly payments. This can be a huge emotional benefit for anyone who would prefer not to have a large loan looming over their head for the next few years. In addition, the possibility of late fees for late monthly payments no longer exists.
- Avoid Interest—No financing involved in the purchase of a car means there will be no interest charged, which will result in a lower overall cost to own the car. As a very simple example, borrowing $32,000 for five years at 6% will require a payment of $618.65 per month, with a total interest payment of $5,118.98 over the life of the loan. In this scenario, paying in cash will save $5,118.98.
- Future Flexibility—Because ownership of a car is 100% and immediate after paying in full, there aren’t any restrictions on the car, such as the right to sell it after several months, use less expensive insurance coverage, and make certain modifications to the car.
- Avoid Overbuying—Paying in full with a single amount will limit car buyers to what is within their immediate, calculated budget. On the other hand, financed purchases are less concrete, and have the potential to result in car buyers buying more than what they can afford long term; it’s easy to be tempted to add a few extra dollars to a monthly payment to stretch the loan length out for a more expensive car. To complicate matters, car salesmen tend to use tactics such as fees and intricate financing in order to get buyers to buy out of their realm. All of this can be avoided by paying in cash.
- Discounts—In some cases, car purchases can come with the option of either an immediate rebate or low-interest financing. Certain rebates are only offered to cash purchases.
- Avoid Underwater Loan—When it comes to financing a depreciating asset, there is the chance that the loan goes underwater, which means more is owed on the asset than its current worth. Auto loans are no different, and paying in full completely avoids this scenario.
There are a lot of benefits to paying with cash for a car purchase, but that doesn’t mean everyone should do it. Situations exist where financing with an auto loan can make more sense to a car buyer, even if they have enough saved funds to purchase the car in a single payment. For example, if a very low interest rate auto loan is offered on a car purchase and there exist other opportunities to make greater investments with the funds, it might be more worthwhile to invest the money instead to receive a higher return. Also, a car buyer striving to achieve a higher credit score can choose the financing option, and never miss a single monthly payment on their new car in order to build their scores, which aids other areas of personal finance. It is up to each individual to determine which is the right decision.
Don’t expect too much value when trading in old cars to dealerships as credit towards newer car purchases. Selling old cars privately and using the funds for a future car purchase tends to result in a more financially-desirable outcome.
In most of the states that collect sales tax on auto purchases (not all do), the sales tax collected is based on the difference between the new car and trade-in price. For a $25,000 new car purchase with a $10,000 trade-in value, the tax paid on the new purchase with an 8% tax rate is:
($25,000 – $10,000) × 8% = $1,200
Some states do not offer any sales tax reduction with trade-ins, including California, District of Columbia, Hawaii, Kentucky, Maryland, Michigan, Montana, and Virginia. This Auto Loan Calculator automatically adjusts the method used to calculate sales tax involving Trade-in Value based on the state provided.
Using the values from the example above, if the new car was purchased in a state without a sales tax reduction for trade-ins, the sales tax would be:
$25,000 × 8% = $2,000
This comes out to be an $800 difference which could be reason for people selling a car in these states to consider a private sale.