Auto Loans 101: How to Set a Budget and Research Vehicles and Financing

Buying a car—new or used—is likely to be one of the biggest purchases you’ll ever make. It’s important to know your options when it comes to getting a loan, because finding the right financing can save you hundreds or even thousands of dollars in the long run. 

The first step in buying a car is determining how much you can afford. It’s important to consider not just the cost of the vehicle, but also the taxes, insurance, financing, fuel costs and maintenance. Calculating the Total Cost of Ownership will give you a better sense of which vehicles will fit comfortably into your price range. 

Financial experts often recommend using the “20 percent rule” when building a budget for auto expenses, which means you shouldn’t spend more than 20 percent of your net income, or take home pay, on your car. 

The internet offers a multitude of resources for car shoppers to research vehicles and comparison shop for the best prices and financing. 

• You can find detailed information on new and used vehicles on websites such as Kelley Blue Book, Edmunds, CarGurus, TrueCar and Capital One’s Auto Navigator.
• Many of these websites also make it simple for you to search for cars available in your area and compare prices at multiple dealerships. 
• In some cases, you can also see if you pre-qualify for a loan on a vehicle you’re considering. 
• If you’re buying a used vehicle, be sure to look at the CARFAX or vehicle history report, before scheduling a test drive. 

If you’re going to apply for auto financing, lenders will look at your credit score and history, among other things, to help determine whether you qualify for a loan and at what interest rate. 

With good credit, you are likely to be offered a lower interest rate, which will save you a significant amount over the life of the loan. If you have average or below average credit, you could still be eligible for financing, but it may come with a higher interest rate. 

So, before you shop for an auto loan, check your credit score for free with CreditWise from Capital One. While the score provided by CreditWise may not be the same score lenders use in making credit decisions, it will give you a good picture of where you stand with your credit. You can also request free copies of your credit reports at AnnualCreditReport.com. Make sure your credit reports are accurate before applying for a loan, and if you find any errors, report them to the major credit bureaus: Equifax, Experian, or TransUnion. 

Some other factors that can affect the APR, or annual percentage rate of interest, are the length of the loan, the vehicle type and age, and the down payment.

Over the course of an auto loan, your financial situation may change and refinancing can become an option. 

You’ve probably heard of people refinancing their homes, but refinancing is also available for auto loans. Essentially, refinancing means taking out a new loan at a new, lower interest rate. It doesn’t reduce the debt you owe—but if you qualify for a better rate, it can lower your monthly payments and save you money over the life of the loan. 

There are some scenarios when it makes good financial sense to refinance, such as when you’ve significantly improved your credit score. But for some people, the costs associated with refinancing may outweigh the benefits. 

You can find more information on refinancing an auto loan, and all other aspects of car buying and ownership at Capital One’s Auto Learning Center.