Frequently Asked Questions about Car Loans

Find the answers to the most commonly asked questions about car loans and the financing process here. Learn more about cash rebates, the drawbacks of dealership financing, and more.

Should I take a zero-percent financing offer or a cash rebate?

Sometimes dealerships will offer car loans with zero-percent APRs to borrowers with extremely good credit. However, these borrowers usually have a choice between the 0% APR and a cash rebate. Which option you should choose will depend on the size of the cash loan and the length of the zero-percent car loan. In most cases, the cash rebate is a better deal if you apply it toward your down payment and obtain a low-interest loan elsewhere. Similarly, the cash rebate is also the better option if the term of the zero-percent loan is extremely short. With a very short term, your monthly payments will be extraordinarily high, which is why the rebate makes more sense.

What is the purpose of a down payment on a car loan?

Down payments on car loans serve a number of purposes. First, the down payment will reduce the amount you have to borrow, thereby lowering your future monthly payments and interest expenses. Secondly, a down payment will pay for the first year of your vehicle's depreciation. New cars depreciate a great deal in the first year, which could result in the borrower owing more on the car than it is worth. A down payment helps you avoid this predicament.

What are the pros and cons of dealership car loans?

Car buyers are usually attracted to the convenience of dealership car loans. They can use the dealer as a one-stop source for the vehicle purchase and financing. On occasion, dealerships also offer exclusive financing deals to buyers with qualifying credit. On the other hand, dealerships tend to supply auto loans with very high interest rates. The dealership increases the rates by up to several points to make commission off of the financing package. As a result, dealership auto loans are one of the most expensive ways to finance a car.

How much should I spend on my car?

To determine how much you should spend on your vehicle, you will need to calculate your debt-to-income correlation. Add up all of your monthly debt obligations (including any car loans) except your mortgage payments and divide them by your net income (the money you take home after taxes). The resulting percentage represents your debt-to-income ratio. Financial experts recommend keeping your debt-to-income ratio below 15%. Set the price range of your next vehicle accordingly.