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5 car loan basics you need to know

Understanding a few key basics may help you make a good decision about borrowing money to finance a vehicle.

With the exception of a home mortgage, a car loan represents the largest sum of money most people will borrow at once. Yet, many people may not think much about financing their new ride until they walk onto the car lot. Check out this cheat sheet before you even start your car search.

  1. Credit score
    Dealers sometimes advertise extremely low interest rates that are typically available only to buyers with exceptionally high credit scores — often 800 and above. You may be able to obtain your credit score for free through one of the three credit bureau websites. Also, check your credit card provider’s website, as they sometimes provide free credit scores. In general, the lower your score, the higher your interest rate may be. If you currently have a lower credit score, you have several options: apply for credit to see if you get approved and at what rate (you can try to refinance at a later date to get a lower rate), delay your purchase and try to raise your score over time, increase the down payment to lessen the amount of the loan or consider a co-signer.

  2. Pre-approval
    Getting pre-approved by a lender may help you set realistic expectations for how much car you can afford. Whether you’re purchasing a new car or a used one, you’ll be in a better position when negotiating price and financing terms.

  3. Loan term
    Some buyers choose a 72-month or even an 84-month loan as a way to minimize monthly payments. But there’s a flipside to this: It typically means paying more interest. In fact, according to Nerd Wallet , a borrower can expect to pay nearly three times as much in interest over the course of a 72-month loan compared to a 60-month loan. Use an auto financing calculator to see the differences among loan terms.

  4. Rate vs. incentives
    Some dealers may offer the option of either an extremely low interest rate or a cash rebate — but not both. And it’s not immediately obvious which is the better deal. Use an online calculator that compares low APR to cash back to help you.

  5. Payoff protection
    Even if you are in a crash and your vehicle is deemed a total loss, you’ll still owe the remaining balance on your loan. And if the vehicle is worth less than the balance of the loan at the time of the accident, you might not get enough money from an insurance settlement to pay it off. Every vehicle loan from State Farm Bank® comes with Payoff Protector®* which may provide financial protection if your vehicle is determined to be a total loss or stolen and your insurance settlement isn’t large enough to cover the unpaid principal balance due on the loan.


*Payoff Protector is not an insurance product. Subject to the terms, conditions, and restrictions of the Payoff Protector provision in your State Farm Bank Promissory Note and Security Agreement. If your vehicle is determined to be a total loss before the loan is paid off, State Farm Bank will cancel the difference between the insurance payout and the unpaid principal balance due on the loan. Certain restrictions apply. For example, your loan must be in good standing.

State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates) is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites hyperlinked from this page. State Farm has no discretion to alter, update, or control the content on the hyperlinked, third party site. Access to third party sites is at the user's own risk, is being provided for informational purposes only and is not a solicitation to buy or sell any of the products which may be referenced on such third party sites.

State Farm Bank, F.S.B., Bloomington, Illinois ("Bank"), is a Member FDIC and Equal Housing Lender. NMLS ID 139716. The other products offered by affiliate companies of State Farm Bank are not FDIC insured, not a State Farm Bank obligation or guaranteed by State Farm Bank, and may be subject to investment risk, including possible loss of principal invested. The Bank encourages any interested individual(s) to submit an application for any product(s) offered by the Bank. We also encourage you to obtain information regarding the Bank's underwriting standards for each type of credit or service offered by visiting® or by contacting the Bank at 877-SF4-BANK (877-734-2265). If you are deaf, hard of hearing, or do not use your voice to communicate, you may contact us via 711 or other relay services. To apply for a Bank product, you may also see your participating State Farm® agent.

State Farm Bank®
Member FDIC
Equal Housing Lender

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