smart spending

Getting the first car loan

When you thought about life after graduation, you probably fantasized about dumping that bucket that got you through school and getting into a newer, flashier and more reliable auto befitting a college graduate. But unless you handled your college finances better than most, you'll need a good auto loan to make this fantasy a reality at a price you can afford.

Understanding car loans
  • Down payment/monthly payment
  • Interest rate
  • Term
  • Why credit score matters
  • Shop for the best deal
  • Benefits of pre-approval
  • Shop prepared
But what separates a good loan from a bad one? The critical components are down payment, monthly payment, interest rate and term.

Down payment/monthly payment

The down payment and monthly payment, the numbers that most car buyers pay attention to, are only part of the picture. It's important that you arrange a monthly payment and down payment that fit your budget and not become a "payment buyer." Payment buyers get caught taking a dealer's monthly payment figure instead of setting their budget before entering the showroom. Try playing around with Bankrate's car loan calculator to figure out how much you can afford to spend.

Interest rate

With interest rates, you want the lowest APR (annual percentage rate) possible. This rate varies depending on where you get the loan and your credit history. While it's true that used cars offer a lot of advantages over new cars, including lower depreciation and more car for your money, expect to pay a higher interest rate when financing one.


As for the loan term, most experts recommend going no longer than 48 months. You may be tempted to go longer -- it will allow you to buy a more expensive car with the same monthly payment -- but even if you get a relatively low interest rate, you'll probably end up paying more in interest than you should.

And you'll run the risk, if the car is wrecked or stolen, of owing more on the loan than the insurance company is willing to give you for the car. Some dealers and insurers offer gap insurance, designed to protect you from this, but a good rule of thumb is, if you need gap insurance, you're probably drawing the loan out too long.


"If you can't do 48 months at the best interest rate, move to a cheaper car," says Anthony Giorgianni, an associate finance editor with Consumer Reports.


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