4 Things I Wish I Knew Before I Got My First Auto Loan

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Buying a new car (or a new-to-you car) is exciting, but it can also be easy to fall into traps — especially if you’ve never taken out a car loan before. I bought my first car in my 20s and financed it through a local credit union. While the process went pretty smoothly, there were definitely a few things I didn’t know that may have made it easier.Alert: highest cash back card we’ve seen now has 0% intro APR into 2026
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Click here to read our full review for free and apply in just 2 minutes. So, if you’re getting your first auto loan, here are a few factors to keep in mind.1. Your credit score directly impacts your interest rateAs I mentioned above, I took out my first car loan in my early 20s. I knew that my credit score impacted whether I’d be approved and how much I’d be approved for, but I didn’t realize just how much my credit score would impact my interest rate — and thus how much I’d pay over the life of the loan. Whether you buy a new or used car can also impact your credit score.Here’s the average interest rate you can expect to pay based on your credit score:FICO® ScoreAverage Interest Rate for New Car LoansAverage Interest Rate for Used Car Loans781 to 8505.25%7.31%661 to 7806.87%9.36%601 to 6609.83%13.92%501 to 60013.18%18.86%Data source: Experian State of Automotive Finance Marketing Report Another thing to keep in mind is that your credit score can also impact your car insurance rates.The best way to lower car insurance costs is to shop around. Check out our list of the best car insurance companies.2. You might need gap coverageI totaled my first car before paying off the loan. (I don’t recommend driving too fast down hairpin turns.) Luckily, I had paid enough off the loan so that the insurance payout covered the rest of the loan. But if you buy a new car, that might not be the case.New cars can lose up to 20% of their value in the first year, so you can easily owe more than the car is worth. For example, let’s say you pay $30,000 for a new car with a 7% interest rate and a 60-month term. You even put 20% down because you’re trying to be responsible. After one year, you’re in a car accident and total your car.Assuming you made regular payments and didn’t pay anything extra, you’ll still owe $24,341 on the car — but if it loses 20% in value, insurance might only pay you $24,000 or even less.In this case, it’s only a few hundred dollars’ worth of difference. But if you buy a car that decreases in value faster, get a higher loan interest rate, or don’t put 20% down, you could owe thousands of dollars on a car you can’t drive.If you’re buying a new car, consider whether you need gap insurance to avoid making payments on a car you no longer have.3. Dealerships will adjust your loan term to meet your budget (and that’s not always a good thing!)If you walk into a car dealership, there’s a good chance they’re going to ask you how much you can afford to pay a month, not how much you actually want to spend. That’s because they can adjust the term (length) of the loan to match your budget, which means paying thousands extra in interest over the life of the loan.So, if you can afford to pay $500 a month, they aren’t just going to show you cars that you can pay off at $500 per month in 36 or 48 months. They might also show you a car double that value and then increase the term to 72 or 84 months. You pay the same per month — but much more over the length of the loan.4. Paying even a little extra makes a huge difference in total loan costsCompound interest is great when your money is growing in a high-yield savings account. But compound interest works against you in debt. When I got my first car loan, I paid what I owed each month, but I didn’t realize paying even $50 extra would have saved me thousands in interest — and shaved months off of my loan.For a $20,000 car loan with 7% interest and a 60-month term, paying just $100 extra a month will allow you to pay off the loan 13 months early and save you $893.74 in interest payments.Taking out your first auto loan is a learning experience, and being informed can save you money and stress. Keep in mind that your car loan is only part of your car expenses; the price of insurance can also drive up your costs, so it’s worth shopping around for lower rates.Save more on car expenses by exploring the cheapest car insurance companies.Alert: highest cash back card we’ve seen now has 0% intro APR into 2026
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!
Click here to read our full review for free and apply in just 2 minutes. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
Motley Fool Money does not cover all offers on the market. Editorial content from Motley Fool Money is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.”}]] [[{“value”:”

Buying a new car (or a new-to-you car) is exciting, but it can also be easy to fall into traps — especially if you’ve never taken out a car loan before. I bought my first car in my 20s and financed it through a local credit union. While the process went pretty smoothly, there were definitely a few things I didn’t know that may have made it easier.

Alert: highest cash back card we’ve seen now has 0% intro APR into 2026

This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!

Click here to read our full review for free and apply in just 2 minutes.

So, if you’re getting your first auto loan, here are a few factors to keep in mind.

1. Your credit score directly impacts your interest rate

As I mentioned above, I took out my first car loan in my early 20s. I knew that my credit score impacted whether I’d be approved and how much I’d be approved for, but I didn’t realize just how much my credit score would impact my interest rate — and thus how much I’d pay over the life of the loan. Whether you buy a new or used car can also impact your credit score.

Here’s the average interest rate you can expect to pay based on your credit score:

Another thing to keep in mind is that your credit score can also impact your car insurance rates.

The best way to lower car insurance costs is to shop around. Check out our list of the best car insurance companies.

2. You might need gap coverage

I totaled my first car before paying off the loan. (I don’t recommend driving too fast down hairpin turns.) Luckily, I had paid enough off the loan so that the insurance payout covered the rest of the loan. But if you buy a new car, that might not be the case.

New cars can lose up to 20% of their value in the first year, so you can easily owe more than the car is worth. For example, let’s say you pay $30,000 for a new car with a 7% interest rate and a 60-month term. You even put 20% down because you’re trying to be responsible. After one year, you’re in a car accident and total your car.

Assuming you made regular payments and didn’t pay anything extra, you’ll still owe $24,341 on the car — but if it loses 20% in value, insurance might only pay you $24,000 or even less.

In this case, it’s only a few hundred dollars’ worth of difference. But if you buy a car that decreases in value faster, get a higher loan interest rate, or don’t put 20% down, you could owe thousands of dollars on a car you can’t drive.

If you’re buying a new car, consider whether you need gap insurance to avoid making payments on a car you no longer have.

3. Dealerships will adjust your loan term to meet your budget (and that’s not always a good thing!)

If you walk into a car dealership, there’s a good chance they’re going to ask you how much you can afford to pay a month, not how much you actually want to spend. That’s because they can adjust the term (length) of the loan to match your budget, which means paying thousands extra in interest over the life of the loan.

So, if you can afford to pay $500 a month, they aren’t just going to show you cars that you can pay off at $500 per month in 36 or 48 months. They might also show you a car double that value and then increase the term to 72 or 84 months. You pay the same per month — but much more over the length of the loan.

4. Paying even a little extra makes a huge difference in total loan costs

Compound interest is great when your money is growing in a high-yield savings account. But compound interest works against you in debt. When I got my first car loan, I paid what I owed each month, but I didn’t realize paying even $50 extra would have saved me thousands in interest — and shaved months off of my loan.

For a $20,000 car loan with 7% interest and a 60-month term, paying just $100 extra a month will allow you to pay off the loan 13 months early and save you $893.74 in interest payments.

Taking out your first auto loan is a learning experience, and being informed can save you money and stress. Keep in mind that your car loan is only part of your car expenses; the price of insurance can also drive up your costs, so it’s worth shopping around for lower rates.

Save more on car expenses by exploring the cheapest car insurance companies.

Alert: highest cash back card we’ve seen now has 0% intro APR into 2026

This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!

Click here to read our full review for free and apply in just 2 minutes.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
Motley Fool Money does not cover all offers on the market. Editorial content from Motley Fool Money is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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