Banks differ in the lending process; many offer a 24- to 72-month term for auto loans, while some offer more. Although you can apply for your preferred loan term, consider your budget and rate differences based on term length before you apply. Also consider the information the bank uses to determine your approved loan term.
Budgeting
To decide how long of a term to apply for, consider your overall vehicle price and budget. Include your taxes and fees; call your state's motor vehicle department for your tax rate and fee requirements. Edmunds.com offers a variety of auto loan calculators that allow you to price a vehicle based on an affordable monthly payment, term options and average interest rates. Using an auto loan calculator initially helps to determine affordability and price range before applying for a pre-approval or pursuing a vehicle.
Rate Considerations
Manufacturers often offer low-rate financing for new vehicles; however, the monthly payments for these offers are not always affordable without a significant down payment. For example, you may find 0 percent financing for a new car, but only for a 36-month term. The car payment for a $20,000 vehicle for 36 months at 0 percent (not including additional purchase fees and tax) is $555 per month. Rates from 24 to 60 months remain consistent for most banks, while longer terms warrant higher rates. Call a bank ahead of time to find out about rate differences.
Term Approval Factors
Banks may approve your loan term or decline it based on your debt-to-income ratio. You may feel you can afford a $555 car payment, but the bank ultimately determines if you can or not. Expect your lender to view your credit report; it uses your debts and monthly payments to determine your debt-to-income ratio. This may be inaccurate if you are the sole person on a mortgage or co-signed a car loan, as the debt appears to be your responsibility. The lender views your most recent pay-stub to determine your gross annual income. A lender can require that you take out a longer term to lower your payment, unless you use a co-signer.
Preapproval Benefits
Once you determine your budget, an affordable term and vehicle price, apply to a lender for a pre-approval. Applying for a pre-approval ensures your approved rate and term so you can shop accordingly. Additionally, the lender will let you know if you need a down payment or if restrictions, such as term, maximum payment or vehicle value, affect your loan approval. Obtaining a pre-approval allows you to adjust your price range so you can stick to your budget.
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