Auto Financing: More than a Monthly Payment

For most people, a vehicle is essential. They help us get to work, take children to school, care for our families and run our errands. It’s one of the largest purchases many of us will make, and a major financial decision.   

While some may be able to make a purchase outright, the reality is that most people rely on financing to make a car purchase possible. That means understanding how auto loans work, what questions to ask, and what to look for before signing paperwork is an important part of protecting your financial well-being.  

When shopping for a car, it is easy to focus on finding the right vehicle, negotiating the price, or securing a monthly payment that fits your budget. But the financing decision can have just as much impact (or more) on your financial well-being as the vehicle itself.  

The loan you choose can affect your monthly Spending & Savings Plan (aka budget), the total amount you pay over time, and your ability to save for other financial goals. Taking time to understand your options, compare offers, and review the details before signing can help you make a more informed decision.  

Here are a few things to consider when shopping for auto financing.  

Start with a Clear View of What You Can Afford  

Before talking with a lender or visiting a dealership, it’s important to take the time to understand what’s realistically affordable for you.  

It can be tempting to focus only on the monthly payment, but the true cost of owning a vehicle includes more than just the loan. Consider expenses such as the monthly payment, insurance, fuel, maintenance and repairs, and registration, taxes and fees.  

A vehicle should support your financial life, not make it harder to cover everyday expenses, manage debt, or save for the future. Having a clear picture of what you can afford before you shop can help you avoid feeling pressured into a loan that stretches you beyond your payment comfort zone.  

Get Pre-Approved Before You Shop 

One of the BEST decisions you can make to prepare to finance an automobile is to get pre-approved before visiting a dealership.  

A pre-approval from a bank or credit union can help you understand how much you can borrow, know what interest rate you qualify for, estimate your monthly payment and compare financing options with confidence.  

Pre-approval doesn’t mean you have to use that lender, it just gives you information and will help you make an informed decision.  

Look Beyond the Payment: Understand the Trust Cost of Your Loan  

The monthly payment is just one piece of an auto loan. It can be tempting to choose the loan with the payment that fits most comfortably into your monthly Spending & Savings Plan, but that number doesn’t tell what the loan will ultimately cost you.  

Two loans with similar monthly payments can have very different total costs depending on their interest rate, loan term, fees and the amount borrowed.  

What comparing financing options, pay attention to:  

• Annual Percentage Rate (APR): Represents the overall cost of buying. This is an important number to use when comparing loan offers.
• Finance Charge: The total dollar cost you will you pay to borrow the money.
• Loan Term: How long you will have to repay the loan. A longer term will result in a lower payment, but typically more interest over time.
• Amount Financed: The total amount of credit being provided for the purchase.
• Total Number of Payments: The total amount of payments you will pay over the life of the loan. 

These details are included in the Truth in Lending disclosure you receive with your financing documents. Take the time to review it and make sure it matches what you expected.  

Understanding the full cost of borrowing can help you compare financing options and choose a loan that fits both your current Spend and Saving Plan and your other financial goals.  

The loan isn’t the only thing to review. Before you sign, take a closer took at the buyer’s order too.  

Review Your Buyer’s Order Before Signing  

Your financing documents are the only paperwork that needs your attention during the automobile buying process.  

Before completing the purchase, you’ll receive paperwork that outlines the details of the transaction, often called a buyer’s order.  

While the Truth in Lending disclosure focuses on the cost and terms of your loan, the buyer’s order provides a broader picture of the actual vehicle purchase and should be reviewed before you move forward with financing.  

Review it carefully to make sure you understand and agree with the following:  

• The selling price
• Trade-in value, if applicable
• Down Payment
• Taxes and fees
• Financing details
• Options products and services
• Any other charges included in the transaction  

Pay particular attention to products or services that you weren’t expecting. Extended warranties, service contracts, GAP products, protection plans, and other add-ons may be appropriate for some, but you should understand what they are, what they cost, and whether you want them before agreeing to purchase them.  

Don’t be afraid to slow down and re-evaluate if the paperwork doesn’t match what you’ve discussed. Take the time you need to understand what you agree to.  

Watch for Red Flags  

Being an informed (and empowered) saver doesn’t mean assuming the worst. It means knowing what to look for and feeling comfortable taking a step back when something doesn’t feel right.  

Be cautious if:  

• You feel pressured to make a decision immediately
• A focus is on monthly payment only instead of overall cost
• Unexpected fees or add-ons
• Documents that don’t match what you discussed
• Pressure to sign paperwork before you’ve had time to review it
• Being discouraged from comparing other financing options
• Changes to terms after you thought the deal was complete  

These situations don’t mean you should walk away, necessarily but they are reasons to slow down, ask questions, and make sure you understand what you’re signing.  

Trust your instincts. If something doesn’t feel right, it’s ok to take time to think about it, ask for more details, or walk away. You don’t have to make a major financial decision just because you’re at a dealership.  

You Don’t Have to Be an Auto Finance Expert or know everything there is to know about auto financing to make an informed decision. Start with the basics. The more information you have before you make a decision, the more confident you can feel about choosing financing that works for you.  

This resource was developed in partnership with the CARS Foundation to help consumers make informed auto buying and financing decisions.