Auto Loans

Comparing Auto Loans: Learn the Basics

If you start to go cross-eyed when comparing auto loans, you’re not alone. It may be tempting to take the first offer you receive from the car dealer. Yet, the best way to save money is to apply to a few lenders so you can choose the best. Here we go over the basics of what you might see in an auto loan offer.

What to look for when comparing auto loans

When you receive an auto loan offer, you will probably see four things highlighted: the lender, monthly payment, annual percentage rate (APR) and term. These results will be based on your type of auto loan, the amount you asked to borrow and your credit score and/or credit history.

Lender. This is the business lending you the money to buy or refinance a car. It is where you will make payments each month. The type of lender may or may not matter to you, based on your needs:

  • If you like to make your car payment face-to-face, you might want a lender with local brick-and-mortar branches rather than an online lender.
  • You might want a national or regional bank rather than a credit union if you want the best online banking apps and widest availability of branches.
  • You might want an online lender if brick-and-mortar branches aren’t valuable to you.

How can you find the best lender in your area? Read our lender reviews.

Monthly payment. This is the amount of money that comes out of your bank account every month and goes to the lender. You want to be able to afford this monthly payment without a lot of stress. You could use an auto affordability calculator to find out how big or small your monthly car payment should be.

Annual percentage rate. Just like you pay for a car, you have to pay for a car loan. The annual percentage rate (APR) is the cost of credit, including interest and fees, expressed as a percentage. The higher the APR, the more you are paying the lender.

Term. This is how long your auto loan would last. It is usually expressed in the number of months rather than the number of years. Here’s a cheat sheet:

Months Years
36 3
48 4
60 5
72 6
84 7

What to focus on when comparing auto loans

With all of that information, what should you focus on? Here are the three most important things to look at.

Monthly payment. As we mentioned earlier, your monthly payment needs to be affordable to you. It should not be so big that you’ll need to only eat ramen and hot dogs but not so low it means your auto loan lasts forever. Getting you to focus on the monthly payment is a favorite salesperson tactic; dealerships know that a low monthly payment sounds attractive. What the salesperson might not explain is that it may be a disguise for a long-term auto loan that brings a high cost of borrowing over time.

APR. This number may tell you more — the lower the APR, the less you would probably pay for the loan.

Interest paid. This is how much the loan costs, in a dollar amount, if you paid everything on time. It’s not unusual for this number to be in the thousands.

    • Why do lenders highlight APR instead of interest paid? Because “interest paid” could change, but the APR won’t, lenders highlight APR instead. You could pay less in interest if you pay off the loan early.
    • How do you figure out the interest paid? 
      An easy way to figure out interest paid is to plug the auto loan offer numbers into an auto loan payment calculator.

Examples of how to compare auto loans

Example 1: Compare rates

Imagine you applied for a $15,000 auto loan and got two auto loan offers that are the same, except for APR. One has 4% APR, the other has 5%. While Lender B’s offer is only one point higher, and the monthly payment is only $7 more, you would end up paying $356 more to the lender in total, if you paid everything on time.

Lender Term (Months) APR Monthly Payment Interest Paid
Lender A 48 4% $373 $1,383
Lender B 48 5% $380 $1,739

Example 2: Compare terms

What if the APR is the same, but the term is longer? With a longer term, the monthly payment goes down by about $70 per month, which is enticing. But you would be making payments an entire  year longer. Overall, you would pay $349 more than if you took the shorter loan.

Lender Term (Months) APR Monthly Payment Interest Paid
Lender A 48 4% $373 $1,383
Lender B 60 4% $304 $1,732

Example 3: Compare rates and terms

If you received three auto loan offers, for the same $15,000 application, you could look at them like this.

Lender Term (Months) APR Monthly Payment Interest Paid
Lender A 48 4% $373 $1,383
Lender B 48 5% $380 $1,739
Lender C 60 4% $304 $1,732

The least expensive loan is from Lender A — it has the lowest rate and lowest term. The tradeoffs of choosing Lender A are that you would have a higher monthly payment, but for a shorter term and you would pay less overall.

The lowest monthly payment is from Lender C. The tradeoff is that you would pay $349 more in interest than if you chose Lender A.

It might not make a lot of sense to choose Lender B and pay a lot in interest for a shorter term.

The bottom line

Your auto loan monthly payment should be comfortably affordable to you. Using an auto loan calculator to look at interest paid is one of the best ways to compare auto loans.

You should choose the least expensive auto loan that works within your budget. Based on the examples, if you could afford a $373 monthly payment, it might be worth it to take the least expensive loan, save money and pay it off in a shorter amount of time. But if you would stress every month about making that payment, it might be worth it to you to choose Lender C and pay $349 more in total interest over five years.


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