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?

Answer
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!
Eric Schad
Answered on Nov 09, 2021
Eric Schad has been a freelance writer for nearly a decade, as well as an SEO specialist and editor for the past five years. Before getting behind the keyboard, he worked in the finance and music industries (the perfect combo). With a wide array of professional and personal experiences, he’s developed a knack for tone and branding across many different verticals. Away from the computer, Schad is a blues guitar shredder, crazed sports fan, and always down for a spontaneous trip anywhere around the globe.
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