The cost of purchasing a vehicle has surged in recent years due partly to inflation, supply chain disruptions and manufacturing costs. While the market is stabilizing, buying new and used cars is still quite expensive. According to Kelley Blue Book‡, the average price for a new car is $47,401 and the average price for a used car is $25,328. With these factors in mind, it’s important to be as prepared as possible if you need to purchase a car, and to learn the basics of auto loans and financing before you commit.
Preparing for an auto purchase
Buying a car is not a spur-of-the-moment event. Instead, plan out your purchase several months before you plan to take home a vehicle. This includes understanding your current financial health, your credit score, and sellers in your area, in addition to researching the car-buying process to avoid surprises.
Notably, unless you’re paying cash for your vehicle, you’ll need to finance your purchase with an auto loan. To ensure the process goes smoothly, evaluate your finances, including monthly income and expenses, and establish a budget to help you save some money before applying for a loan.
Check your financial fitness
Understand your credit health, which can impact your financing terms, by reviewing your credit report and credit score. A credible place to access your credit score is annualcreditreport.com, which is free to use. You can use this information to check average car loan interest rates and get an idea of what your rate may be. Gather basic financial information like income, debts, and down payment amount for your lender.
Learn the lingo before you head to the lot
Be sure to familiarize yourself with auto loan terms‡ – including annual percentage rate (APR), payments, and principal. Knowing these terms can help you feel more comfortable in the sale negotiation and discussion. Plus, before taking out any loan, it’s always good practice to ensure you understand how that debt will impact your finances over time.
Research the vehicle market
Compare available inventory and prices at local dealerships with what you want and need from your next vehicle. Also review upcoming promotions, sales or special prices in the event you can time your purchase to catch the best price.
Budgeting basics for vehicles
When deciding how much you can afford, consider recurring vehicle expenses such as gas, maintenance, monthly car payments, and insurance. Remember, in addition to those recurring expenses, you’ll need to make a down payment on your purchase and pay the sales tax, fees, and vehicle registration, depending on your state.
When financing a vehicle with an auto loan, a good rule of thumb is to plan for a down payment of 10% for a used car and 20% for a new car‡. Remember, the bigger your down payment, the less you’ll need to borrow and repay.
One way to avoid taking on a bigger car loan than your budget can comfortably absorb is to apply the 20/4/10 rule.
- 20% down payment
- 4-year loan term
- No more than 10% of your gross income
Consider pre-approval
Loan pre-approval from a lender can help lock in your interest rate and be in a good position to negotiate at the dealership.
Now that you’ve determined what you can afford and researched your best options, it’s time to choose the right vehicle.
Compare lenders and get loan offers
There are two ways to finance an auto loan: You can work directly with a financial institution like your bank, credit union, or online lender, or have the dealership arrange financing on your behalf. Obtaining loan offers from multiple lenders may be a good idea to compare your options and find the best deal.
Some lenders may restrict your buying options by vehicle model, manufacturer, or age. Most loan offers are valid for about 30 days, so you’ll want to decide promptly. Once you’ve found the right vehicle, confirm the terms with your lender and read the contract carefully before signing.
One benefit of purchasing from a dealership rather than a private seller is they can guide you through the purchasing process by handling the paperwork and helping you with the car’s title. After the paperwork is complete and you have the keys in your hand, you’re ready to drive off the lot. Private sales may include more time spent notarizing documents and visiting your local department of motor vehicles.
Auto loans can help you find the car you need
Purchasing a vehicle is a rewarding experience, and with this knowledge, you should be able to confidently navigate the car-buying process. For more information, visit our car calculator and to learn what you can expect from an auto loan take the Car Loan course in our Financial Education Center.
UMB personal banking solutions offer convenience and simplicity to meet all your financial needs. From home loans to auto financing and everything in between, see how UMB personal banking can work with you to find the right products for your life and lifestyle.
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