Buying your first car is exciting, but figuring out how to pay for a new vehicle can feel confusing at first. Once you cut through the jargon and see the steps laid out, you’ll see the process is more straightforward than it initially seems. From checking your credit score to finalizing the paperwork, we’ll walk you through the process so you can cruise into the sunset with a vehicle that fits your lifestyle and budget.
What is a car loan?
Most people who purchase a car will need to finance at least part of the cost with a car loan. When you take out a car loan, you’ll pay monthly installments over the loan term, which usually ranges between 36 and 72 months. Each payment will go towards what you borrowed (the principal) plus interest. Your interest rate is based on factors like your credit score and debt-to-income ratio. At the start of your loan term repayment, more money goes towards paying off interest. Towards the end, more money will go towards paying off the principal.
Key terms to know about car financing
Dealing with finances doesn’t come second-nature to everyone, so don’t stress if some terms seem confusing. Here’s our auto finance quick reference glossary to get you started:
- Downpayment: Cash you pay up front to reduce the loan amount. (Generally, the bigger your downpayment is, that means you’ll have to borrow less. And the smaller your loan means there’s less interest to pay over time.)
- Principal: The actual amount of money you borrow (does not include interest).
- Interest: The cost of borrowing money and what you owe on top of the principal.
- Interest Rate: The raw percentage a lender charges you to borrow money.
- APR (Annual Percentage Rate): The interest rate PLUS lender fees and costs. Look at APR rather than the interest rate to get a more realistic picture of what you’ll pay monthly.
- Debt-to-Income Ratio: The ratio of your monthly income that goes toward all your monthly debt. Lenders look at this to see if you can take on more debt.
- Term (Loan Length): Total amount of months it will take to pay off the loan.
- Collateral: Something of value a lender can take if the loan isn’t paid back. For a car loan, this is usually the car itself.
- Hard Inquiry: A check on your credit history by a lender that affects your credit score.
How does financing a car work?
There are many different types of financing that can get you in the car you want. It can also mean getting pre-approval from a financial institution, leasing, dealer financing, or other payment plans, depending on the lender. You’ll weigh the trade-offs and look at your options to find the right deal for your budget. For example, if you want a lower monthly payment, you have two options:
- Put a larger payment down, which requires more cash upfront.
- Extend the loan term, which costs more in interest over time.
Before signing any paperwork, here are the key factors to look at:
- Interest rates: Shop around because small differences can add up to thousands of dollars in the end.
- Term length: Shorter terms mean higher payments at a lower overall cost. Longer terms mean lower payments, but cost more in interest.
- APR vs. interest rate: APR includes fees and gives you the real yearly cost unlike the raw interest rate.
Considerations before buying a car
Buying a car is a long-term decision, so it pays to do your research. When comparing cars, look at the total cost of ownership and not just the sticker price. This includes insurance, maintenance, gas, and loan costs. Consider your actual needs (size, reliability, fuel efficiency, and safety features) vs. the nice-to-haves (leather seats, advanced tech features, luxury brands, and high horsepower). Sacrificing a few car upgrades could free up cash for a bigger downpayment and lower monthly loan payments.
New vehicles
Buying a brand new car is a good option if you want full warranty coverage and don’t want to worry about repair history. Before you buy though, ask yourself these questions:
- Is this car within my price range? Don’t just look at the sticker price. Make sure the monthly payments, insurance, and maintenance fit your budget.
- Am I giving myself enough time to decide? Don’t let dealerships push you into a quick sale. Compare and test-drive different models and sleep on the decision to avoid buyer’s remorse.
- Am I prioritizing needs over extras? Don’t splurge on luxury features. Focus on essentials like safety ratings, fuel efficiency, and reliability.
- Have I researched new-car incentives and warranties? You can save thousands with manufacturer rebates, low interest financing, or extended warranties on new models.
- Am I comfortable with depreciation? A new car can lose up to 20% of its value in the first year. Make sure that trade-off fits your long-term plans if you want to trade or sell down the road.
Used vehicles
Buying a used vehicle can save you money, but you’ll need to be aware of the risks. Before committing, ask yourself these questions:
- What does the car’s history say? Run a vehicle history report (like Carfax® or AutoCheck) to uncover accidents, title issues, or major repairs.
- Did I inspect the car in the daylight? Scratches, dents, and rust are easier to spot in natural light than under artificial lighting.
- Was it inspected by a mechanic? Paying for a professional inspection can catch hidden problems that could cost you thousands later.
- Am I clear on the mileage and wear? Higher mileage isn’t necessarily bad if the car was well maintained. However, look at the model year, age, and expected lifespan of a used vehicle you’re considering.
- What is the warranty situation? Many used cars are sold “as is.” Check for any manufacturer warranty still in effect or if a certified pre-owned program offers extra coverage.
- How will I pay for it? If you’re getting a car loan for a used vehicle, interest rates may be higher than on new cars. Be prepared to shop around for the best rate.
Types of car financing
There are several ways to finance a car. Here’s a breakdown of the most common options, with their pros, cons, and trade-offs.
Car loan
Before applying for a loan, you can get pre-approved with a hard inquiry for a limited time, locked-in rate. If you just want a ballpark idea, go with pre-qualification. But, if you’re ready to deal and want leverage to negotiate with, you’ll want pre-approval.
Dealership financing
This is a type of indirect financing where the dealership acts as a middleman to arrange a loan for you through multiple lenders. This is convenient for coming up with financing on the spot but may come with higher interest rates or add-on fees. Before signing, compare the dealer’s offer with outside options. Golden 1 works with many California auto dealers to provide financing directly at the dealership and you’ll get the same low rates from us whether you apply at the dealer or in one of our branches.
Financial institution financing
These loans come directly from a bank, credit union, or other lender to give you direct financing. This is a good way to get lower rates, especially if you have good credit and a relationship with the institution. The downside is you'll need to get pre-approved ahead of time.
Leasing a vehicle
Car leasing is like renting a car for a few years with the option to buy it outright at the end of the lease term. You’ll make monthly payments, usually for 24 to 36 months, with limits on mileage and other conditions spelled out in the contract. Leasing often has lower monthly payments than a loan, but you don’t automatically own it at the end. This is a good option for people who like having new cars every few years and don’t mind carrying a car payment.
How to budget for a car loan
Before you start the loan process, you'll need to set a realistic budget. First, figure out your monthly income and make a list of your monthly expenses, including rent, utilities, groceries, debt payments, and smaller items like streaming services. This will give you a full picture of what you're working with to make a car payment without stretching your budget too thin.
To test different scenarios, try using Golden 1’s auto loan calculator to see how loan amounts, interest rates, and terms would affect your payment. Finally, set a savings goal for your down payment and an allotment for ongoing costs like insurance, monthly loan payment, maintenance, and gas.
What percentage of take-home pay should go for a car loan?
Most experts recommend keeping your car payment at 10–15% of your monthly take-home pay to maintain a healthy budget. If you add in insurance, fuel, and maintenance on top of the loan, try to keep total car costs under 15–20% of your take-home pay.
Auto loan requirements
Before getting approved for a car loan, you'll need to meet a few requirements. Here are the most common factors they look at:
- Credit score: Your credit score is a risk indicator for lenders. A higher score will usually mean lower interest rates and better terms. You may still qualify with a lower score but expect to pay more in interest or need a larger down payment.
- Steady source of income: Showing a consistent paycheck or other income stream proves you can handle monthly payments. You could use pay stubs, bank statements, or tax returns, depending on the lender. Without steady income, it will be hard to qualify for financing since lenders want assurance you can pay them back.
- Debt-to-income ratio (DTI): This is a ratio of how much of your monthly income goes toward paying off debt. Most lenders want your DTI below 40–50%, with lower being better. A high DTI suggests you may have a hard time taking on more debt, while a lower DTI reassures lenders you can manage the extra loan.
How to get a car loan
Now that you understand the terminology and requirements, getting a car loan should seem more like a straightforward process. Here we break down the process in 6 easy steps.
1. Check your credit score
You can check your credit score by pulling a report from a free service or credit bureau website. We even offer credit monitoring for Golden 1 members through the G1 member portal. Review your score and look for errors, such as incorrect payment histories or fraudulent accounts, that could hurt your chances. Dispute any mistakes before applying to potentially boost your score and qualify for a better loan offer.
2. Determine your budget
Decide how much you can afford each month without straining your budget. Keep your car payment at 10–15% of your take-home pay and remember to add in insurance, gas, and maintenance costs on top of this.
3. Compare loan options
Do your homework and shop around for the best interest rate to save thousands. If you have a pre-existing relationship with a bank or credit union, that may be your best bet for a good rate. For a lower monthly payment without extending your loan term, put as much money down as you can.
4. Choose your car
Pick a car that fits your budget and daily needs, prioritizing essentials like safety and fuel efficiency over unnecessary extras. Staying within your budget to purchase a reliable car is more important than luxury add-ons.
5. Prepare documents for loan application
To speed up the approval process, gather the paperwork lenders will need, including:
- ID
- Proof of income
- Bank statements
- Proof of insurance
6. Review and sign the loan
Carefully read over the loan before signing. Double check the interest rate, loan term, and look for any charges and hidden fees. Ask questions if you don't understand something or if anything seems off. If it all looks good and fits within your budget, you can finalize the deal.
Auto loan interest rates
Your car loan rate will depend on your credit score, the loan term, and whether you're buying new or used.
Benefits of a Golden 1 Auto Loan
Whether you need a reliable ride to get to work or you're tired of stressing about your car breaking down at the worst possible moment, Golden 1 makes it easy to get behind the wheel of a dependable vehicle that fits your budget. Don't let car troubles derail your plans—enjoy low auto loan rates, flexible terms, and a simple online application that gets you pre-approved fast.
Plus, members (or joint account holders) who have been with us for more than 7 months get exclusive access to moneysaving perks through our Member Auto Loan Rate Discount and Enterprise Car Sales partnership:
- An APR discount on your loan
- Your choice of over 250 makes and models
- Free CARFAX® Vehicle History Reports™
We design financing with your needs and budget in mind. Ready to start? Apply for a Golden 1 auto loan today and take the first step toward the independent you.
Car loans FAQs
What is the best loan to get to buy a car?
You'll usually get the lowest APR from a credit union or bank, especially if you’re a member. Look for low fixed interest rates and flexible repayment terms to get the most value out of your car loan.
Can I finance a car with no credit?
Yes, but expect to see higher interest rates and stricter terms since you have no credit history lenders could use to predict repayment. To improve your chances, check out our Financial Wellness Center for resources designed to help you build credit.
What is a good interest rate for my age?
Lenders don't base interest rates on age but rather your credit score, income, and loan term. A good auto loan rate is at or below the national average, which is usually in the low single digits.
Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regard to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.
