If you want to buy a car, you’re most likely also considering auto financing. Taking out a car loan is a big step for many people, and comes with a lot of questions.

The more you know about auto financing, the better prepared you’ll be to go out and get a loan. Keep reading for our extensive list of auto loan questions to help you along the way.

20 Most Common Auto Loan Questions Answered

There’s a lot to get our heads around when it comes to car financing. Here are 20 of the most common questions people ask about auto financing, along with answers. It’s a great place to get started.

1. What are the Different Types of Auto Loan Lenders?

Auto loans are offered by banks, credit unions, and online lenders. Dealerships also offer financing, often through partnerships with lenders. As not-for-profit entities, credit unions are often able to offer lower interest rates and other perks. Be sure to compare offers from different sources to find the best rates and terms. 

2. How Many Lenders Should I Talk to When Shopping for a Loan?

Plan to talk to at least three to five lenders of various types. Try to avoid dealerships at this point, as they will try to sell you a car first and a loan second.  This will give you a good range of initial offers to compare. Aim to seek preapproval from up to three lenders.

3. What is Loan Pre-Approval?

Getting preapproved for a loan is a smart step before setting foot in a car showroom. To be preapproved means a lender has reviewed your financial information and offered you a specific loan amount and terms. Knowing how much you can borrow and on what terms allows you to shop for a car with a clear budget in mind.

4. What Documents Do I Need to Apply for an Auto Loan?

To apply for a loan, you’ll need proof of your identity, address and income, details about your other debts, and information about the car you want to buy. Lenders will also usually ask for access to your credit report and banking information.

5. Does Taking Out an Auto Loan Hurt Your Credit?

Dealers need to check your credit history to assess the risk of lending you money. For pre-approval, they will usually run a “soft inquiry” that will not affect your credit score. However, when you apply formally for a loan, your dealer will run a “hard pull” on your credit report that will temporarily lower your score.

The effect on your credit score is usually minor and should disappear in a few months. If you want to apply for more than one loan, doing so within a short time is a good idea. Inquiries falling within a two-week window are generally considered as a single inquiry. 

6. What Interest Rate Will I Get on My Auto Loan?

The interest rate you are offered on your loan depends heavily on your credit score, as the following table shows.

Source: Experian’s State of the Automotive Finance Market Report: Q1 2024

It also depends on the loan term you select and the prevailing market interest rates. Usually, applicants with higher scores seeking shorter-term loans will qualify for the best rates.

7. What is the Difference Between an Interest Rate and an APR? 

The interest rate on your loan is the total cost of borrowing money in your auto loan, expressed as a percentage of your original loan amount.  Your APR, or Annual Percentage Rate, includes both the interest rate plus any extra fees or costs, like origination fees or loan processing fees that might be rolled into the loan. Your APR gives you a better idea of the total cost of the loan.

8. What is a Good Length for an Auto Loan Term?

Most auto loans fall between 36 and 60 months (3-5 years). While choosing a shorter loan term will let you save on interest payments, longer terms will mean lower monthly loan payments. Remember, however, that your car will lose value even as you pay off your loan. Very long loans risk having you owe more on your car than it is worth.

9. Should I Get a Fixed or Variable Interest Rate on my Auto Loan?

A fixed-rate loan offers the same interest rate throughout the life of the loan, making your monthly payments predictable. The interest on a variable-rate loan can change over time. While you may save money if interest rates fall during your loan term, you will also pay more if interest rates rise. Consider whether having a predictable rate or potentially saving money is more important to you.

10. What is the 50/30/20 Rule for Car Loans?

The 50/30/20 rule is a budgeting rule that suggests you spend 50% of your income on needs, 30% on your wants, and 20% on savings and debt repayment. For car loans, this means your car payment should fit comfortably within your 20% savings and debt repayment budget.

11. What is a DTI Ratio?

Your DTI ratio is your debt-to-income ratio. It’s the percentage of your gross monthly income that will go toward your car payment. Most lenders look for a DTI of 15% or less. This ensures your car payment is affordable and doesn’t strain your budget.

12. Can I Pay Off My Loan Early?

Making larger payments to pay off your loan early is possible, and will save you a lot on interest charges. Be sure, however, that your lender does not charge a prepayment penalty to make up for the lost income from your loan. Check your agreement carefully before signing.

13. What Fees Will I Pay When Applying for a Vehicle Loan?

Common additional charges include loan application, origination, and documentation fees. Some loans also have title and registration fees. Your lender might also require credit insurance. These charges are often rolled into the overall cost of your loan. Be sure to ask your lender for a complete list of charges on your loan.

14. What is the Minimum Amount I Should Put Down on an Auto Loan?

Many dealers prefer a down payment of at least 20%. This shows a commitment on your part to owning your car and paying down your loan. A larger down payment will also lower your interest rate or shorten your loan term.

15. What is 100% Financing?

Some lenders offer 100% loan financing, which means the lender covers the entire cost of the car with no down payment required. While this can make it easier to purchase a car, lenders will typically charge higher rates to cover the increased loan amount and risk of default.

16. What is GAP Insurance?

GAP or Guaranteed Asset Protection insurance covers the difference between what you may still owe on the car and its book value if it’s totaled in an accident or stolen. It’s particularly useful if you owe more on your loan than the car is worth.

17. Can I Sell My Car If I Still Have an Auto Loan?

Yes, you can sell your car at any time, but you must still pay off the remaining loan balance. You can generally use your sale proceeds to pay off your loan or roll the balance into a new loan if you’re buying another car.

18. What is an ‘Upside Down’ Car Loan?

An upside-down car loan means you owe more on the loan than the car is worth. This can happen later in the loan term if the car depreciates faster than you repay what you owe. This can be a serious situation if you need to sell the car or it is totaled in an accident, as you will receive less back from a buyer or insurance than you still owe on your loan.

19. Can I Refinance My Auto Loan to Get a Lower Interest Rate?

Yes, you can refinance your auto loan to lower your interest rate. This makes sense if your credit score has improved or interest rates have dropped. You can choose whether to lower your interest rate or reduce your monthly payment. Be sure, however, that the cost of refinancing your loan does not offset the savings you hope to make.

20. What Happens After I Pay Off My Loan?

After you pay off your loan, the lender will release the lien on your car. You’ll receive the title, and the car is fully yours without any further payments. You can choose to sell your car or to keep driving to get the most value out of your vehicle. 

Argent Credit Union: Loans to Get You Rolling Sooner

The more you know, the better prepared you will be to make important decisions about your car financing. At Argent Credit Union we aim to make the loan application as easy as possible, so you can get your wheels sooner. We also make car ownership more accessible with affordable rates and flexible loan terms. 

Our auto loans feature:

• Easy online application process
• Up to 120% financing for qualified borrowers
• No payment for 90 days
• Competitively priced GAP protection
• Extended warranties
• Longer terms (up to 84 monthly payments)

Ready to start your journey to car ownership? Argent is with you every step of the way!

Click below to learn more about Argent Credit Union’s auto loan options.

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