Shopping for a new car is exciting, but taking out a loan to pay for it can be overwhelming in the long run if you’re not prepared. Auto loan terms, interest rates, and lender practices change every year.
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If you’re planning to finance a car purchase, here are six things you need to know about auto loans before signing on the dotted line.
Interest Rates Are Higher Than They’ve Been in Years
Auto loan interest rates have gone up over the past couple of years, and they’re still relatively high in 2025. According to Experian, the average loan interest rate for new cars is 6.73%, while that of used cars is 11.87%. This means your monthly payments will be higher and you’ll pay more in total interest over the life of the loan.
Before applying for an auto loan, check your credit score. Borrowers with good or excellent credit scores tend to qualify for the best rates, while those with lower scores may get nearly double rates. If your credit score is on the low side, consider delaying your purchase while you work on improving it.
Your Down Payment Matters
With car prices still above pre-pandemic levels and higher interest rates pushing up loan costs, how much you put down plays a bigger role in your total cost.
Putting at least 10% to 20% down can help you reduce the total loan amount and qualify for better rates. It also shows lenders that you’re a low-risk borrower, which could boost your approval odds.
If you can’t afford a large down payment, consider shopping for a more affordable vehicle or waiting until you’ve saved enough.
Pre-Approval Can Give You More Leverage
Getting pre-approved for an auto loan from a bank, credit union or an online lender can help you compare offers and negotiate better. Plus, a pre-approval gives you a clear picture of the rates and terms to expect so you can make an informed decision.
Watch for Hidden Fees
When you take an auto loan, you may expect to pay interest alone. However, there are other hidden costs, like gap insurance, taxes, prepayment penalties, and credit insurance. Some lenders and dealerships also charge extras.
Make sure you carefully review your loan agreement — and don’t be afraid to say no to add-ons you don’t need. It’s also a good idea to ask for a full breakdown of the loan’s cost beforehand.
Shop Around to Compare Offers
Don’t settle for the first loan offer you get pre-approved for. Interest rates, fees, and terms can vary widely between lenders. Shopping around can help you find the best deal and potentially save thousands of dollars over the life of the loan.
Start by checking with your bank, then compare offers from online lenders and dealership financing. Make sure to compare the annual percentage rate (APR), not just the interest rate, since APR includes fees.
Longer Loan Terms May Cost You More in the Long Run
Lenders are offering longer loan terms to make monthly payments more affordable. But while lower monthly payments may look attractive, you’ll end up paying more in interest over time.
Longer loan terms can also put you at risk of owing more on the loan than the car’s value, especially since vehicles depreciate quickly. If you can afford it, opt for a shorter loan term. You’ll pay off the car faster and reduce the total interest paid.
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This article originally appeared on GOBankingRates.com: 6 Things to Know About Auto Loans This Year Before Taking One
