What is a good car loan?
I want to get a car loan for a new Honda Civic, but I don’t want to break the bank doing so. I really just need to know what makes a good car loan. What do I need to look for when I’m shopping around?
A good car loan revolves around how much you can comfortably afford. Being inquisitive while you’re shopping for a loan is a great start!
If you want to follow a rule to help you stay on track, use the 20/4/10 rule. This personal finance theory states that any car loan you get should follow these three guidelines:
- You should have 20% for a down payment
- You should never get a loan longer than 48 months, or four years
- Don’t spend more than 10% of your annual pre-tax income on a car loan
Another aspect to consider is how much interest you pay. If you have great credit and a debt-to-income ratio of less than 43%, you’re a strong candidate for a low interest rate.
For reference, here are the average interest rates for new cars based on credit scores:
- 780+: 2.34%
- 661–780: 3.48%
- 601–660: 6.61%
- 501–600: 11.03%
- 300–500: 14.59%
Because your interest rate is heavily dependent on your credit score, make sure to get a copy of your credit report. If possible, pay any charge-offs, late accounts, or high-interest debt.
You will also want to read the loan’s fine print to familiarize yourself with the terms and conditions. Always check to see if a potential lender has prepayment penalties. If they do, that means you can’t pay extra toward the loan, pay it off early, or refinance without a substantial penalty. Avoid these loans at all costs.
Regardless of where you get a loan, the lender will require you to carry full coverage car insurance. So just as you would when getting a car loan, shop around for car insurance to get the best rate.
A great place to start is the Jerry app. As a full-service insurance broker, Jerry allows you to compare quotes from dozens of insurers in seconds to get the best rate for your car insurance needs!
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