On average, Americans spend $49,507 to buy a new car, according to the most recent data from Kelly Blue Book. Many people opt to finance their purchase, adding interest and other fees to their total cost.

If you plan to take out an auto loan, you’ll want to weigh your options carefully to make sure you’re getting the best deal with a reputable lender.

Here’s what you should know.

How does an auto loan work?

Financing allows you to borrow money to purchase a vehicle and pay it back over time. The borrowed amount, also known as the principal, is subject to an interest rate determined by the lender, which is added on to the total cost of your new car. Monthly payments are made until the loan is fully repaid.

While you are making loan payments, the lender technically owns the vehicle. This means they hold the title to the car as collateral until the loan is fully paid off. However, you still have possession and use of the vehicle if you meet the loan obligations.

Once you make the final payment and fulfill the loan terms, the lender releases the lien on the vehicle. At this point, you become the sole owner, and the title is transferred to your name. The specific process for obtaining the title may vary depending on the state or country where you reside.

Where to find financing

You have several options for financing your next car loan.

Dealership financing

Dealership financing involves obtaining a loan directly from the car dealership. Typically, the dealership provides direct financing or works with third-party lenders to fund your auto loan. While dealer financing offers convenience and one-stop shopping, you may have higher interest rates compared to other options.

Bank and credit union financing

Another option is obtaining financing from a bank or credit union. Financial institutions offer auto loans and typically provide competitive interest rates. If you opt for your existing bank or credit union, you’ll also benefit from the established relationship you have with your lender.

Lender financing

Some lenders focus solely on auto loans, and they may provide competitive rates and flexible terms. It's crucial to compare offers from multiple lenders to ensure you get the best deal. Don’t forget to compare terms as well to make sure you’re comfortable with the financial obligation offered.

Understanding the cost of borrowing

Knowing the key financial aspects of auto financing can help ensure you get the best deal possible.

Interest rates

When you borrow money through an auto loan, the lender charges interest as a fee for lending you the funds. The interest rate is expressed as a percentage and determines the amount you'll pay in addition to the loan principal. A higher interest rate means you'll pay more over the life of the loan, increasing the total cost.

Annual percentage rate (APR)

The APR is an essential metric to consider when comparing interest rates. Unlike the interest rate, which only represents the cost of borrowing, the APR includes both the interest rate and any additional fees associated with the loan. These may include loan origination fees, processing fees or any other charges imposed by the lender. By considering the APR, you get a more accurate understanding of the overall cost of the loan.

Hidden fees and penalties

Be cautious of low interest rate offers that may come with hidden fees or penalties. Some lenders may advertise attractive interest rates to entice borrowers, but then impose additional charges that can significantly increase the cost of the loan. Carefully review the loan terms and conditions to ensure there are no unexpected fees or penalties that could impact the affordability of the loan.

Why finance through a credit union?

When considering auto loan financing, one option worth exploring is financing through a credit union. Here's why:

• Get the best terms: Credit unions often offer more flexible terms compared to other lenders. Spectrum Credit Union offers auto loans with terms available for up to 84 months, giving you the opportunity to choose a repayment period that fits your budget.
• Avoid additional costs: Credit unions typically offer lower fees on auto loans compared to financing through a dealer. This can result in significant savings over the life of the loan.
• Save time at the dealership: By obtaining pre-approval for a car loan through a credit union, you can have your financing sorted before stepping into the dealership. This allows you to negotiate the car price confidently and saves time during the purchasing process.

Navigating your auto financing options doesn’t have to be overwhelming. Join us for a free webinar, “Drive Away Happy: Car Buying Decisions” to learn more about choosing the right auto loan for you.