Car Loans in the US: What You Need to Know to Finance a Luxury Car

Why does every percentage point cost thousands on a luxury car?

An auto loan is a loan where the car itself is the collateral. Until the debt is paid off, you cannot sell the car without settling up with the bank. The payment is the same every month: part of it pays down the debt, and part goes to the bank as interest.

On a $20,000 loan, the difference between 6% and 10% is still bearable. On $70,000, it adds up to thousands of dollars. A big loan works like a magnifying glass: any weak spot in your report, score or income costs many times more.

A typical mistake we see at Excalibur Credit Solutions: people spend months choosing the trim, the leather color and the wheels, but open their credit report for the first time at the dealership. Yet it is the report that sets the rate, and the rate is the real price of the car.

What credit score do you need for a car loan in the US?

A credit score is a rating from 300 to 850 points. There is no single minimum for an auto loan: people buy cars on credit even with a score of 550. The real question is at what rate. For a luxury car, a reasonable goal is 720 or higher, and the lowest rates usually go to people with 780 and above.

The “prime” group is wide: rates will be different at 670 and at 775. The average is just a guide.

There is a catch. Many banks use a separate version of the score for car loans: the FICO Auto Score, on a scale from 250 to 900. It pays extra attention to how you paid for your past cars. Why one person has so many scores is explained in our breakdown of FICO and VantageScore.

Mercedes-Benz, BMW and Porsche have their own finance companies, basically banks owned by the carmaker. Sometimes they offer promotional rates on new cars that are below market. But usually only to the most reliable borrowers, known as “tier 1.” Often that means 720 or higher, and each company sets its own exact cutoff.

What does the bank look at besides your credit score?

Your score only gets you in the door. The bank almost always checks four more things:

• Documented income. If you are an employee: paystubs and your annual W-2 form. If you own a business or work on a 1099: tax returns, often for 2 years. The bank does not count “I make good money” as proof.
• Debt load, DTI (debt-to-income). How much of your pre-tax income goes to debt payments, including your future car payment. The lower it is, the more comfortable the bank feels.
• Down payment. Your own money that you pay up front. For an expensive car, people often recommend about 20% of the price.
• Auto loan history. Whether you have had a car loan before and how you paid it. An auto loan paid off with no late payments is a big plus.

DTI made simple. Income: $12,000 a month before taxes. Rent: $3,000, cards: $300, the new car: $1,293. That is $4,593 in total, or about 38% of income. Every bank has its own limit, but the closer you get to half your income, the harder it is to get approved.

Many immigrants have a gap in auto loan history: years of perfect credit card payments, and then right away a request for $70,000. The bank has never seen how you handle a big payment. So it may ask for a bigger down payment or raise your rate.

Pre-approval before the dealership: how do you avoid 10 inquiries?

Here is how it usually goes. You pick a car and hand over your driver’s license and SSN. The dealership’s finance manager sends your application to several banks, often 8–12. Each bank pulls your report, and a new line appears there: a hard inquiry, a record that you asked for credit.

FICO counts auto loan inquiries made within a short period as one. In newer versions, that window is 45 days, and in older ones it is 14, so stick to 14 days. But the next bank can still see every line on your report. Where the limit is, we cover in our article on how many inquiries is too many.

The solution is pre-approval: the bank approves you in advance, before you go to the dealership. You walk in with a rate already in hand (details in our guide auto loan pre-approval). Here is the order:

1. First, get pre-qualified on the websites of banks and credit unions (a credit union is a nonprofit bank for its members). This is an estimate based on a soft inquiry: your score is not affected, and you can see an approximate rate.
2. Apply for pre-approval at 1–2 banks with the best terms. This usually means a hard inquiry, so do it all within a few days.
3. At the dealership, say it directly: “I’m already approved at this rate. If you can beat it, send my application, but to one or two banks at most.” And ask them to name those banks in advance.
4. Check the inquiries on your report 2–3 weeks after the purchase. Our article what is a hard inquiry explains how.

Loan or lease for a luxury car: which should you choose?

A lease is a long-term rental of a car, most often for 36 months. You pay only for the value the car loses, plus interest and taxes. At the end, you return it or buy it out at a price set in advance.

Leasing is popular for luxury cars: the payment is often lower than with a loan. It works for you if:

• you want a new car every 2–3 years;
• you don’t drive much: the limit is usually 10,000–15,000 miles a year, and you pay extra for every mile over, often 15–30 cents;
• you take good care of the car, since you will get a bill for scratches and dents when you turn it in.

A loan is the better deal if you drive a lot, want to keep the car for five years or longer and someday be free of car payments.

A hypothetical calculation: one car, four different rates

Back to Arsen: the same $70,000 for 72 months, and only the rate changes. Let’s see how much extra he pays the bank.

The difference between 5.9% and 12.9% is more than $17,000, the price of a whole used car. The payment goes up from ≈$1,157 to ≈$1,401 a month.

Now the term. A longer term lowers the payment, which is why dealers like to offer it. But the longer you pay, the more interest you pay.

The second trap: luxury cars lose value fast. With an 84-month loan, you can owe more than the car is worth for years. If you sell it, you pay the difference yourself. Gap insurance covers this gap if the car is totaled or stolen. But the best protection is a decent down payment and a term no longer than 60–72 months.

What to do 60–90 days before you buy: a checklist

1. Get a fresh three-bureau report. The easiest way is through SmartCredit, IdentityIQ or MyScoreIQ. Look for accounts that aren’t yours, wrong late payments and incorrect balances.
2. Found something inaccurate? Send a dispute right away: the bureau usually responds in 30–45 days. You can dispute entries with the bureaus yourself, and it is free. If you don’t have time, Excalibur can take over this process.
3. Lower your utilization, the share of your card limits that you are using. Pay down balances before the statement date, when the bank reports them to the bureaus: under 30% of the limit is fine, under 10% is excellent. More quick steps are in our article on raising your score fast.
4. For 2–3 months before the purchase, don’t open new cards, don’t take store financing and don’t close old cards.
5. Gather your income documents and bank statements.
6. Trading in your old car? Don’t let the dealer “roll” the unpaid balance on it into the new loan, or you will end up paying interest on the old car too.
7. At the dealership, negotiate the final price with taxes and fees (out-the-door price), not a “comfortable monthly payment.” Say no to extra add-ons like paint protection: they are often hidden in the payment.

Don’t want to negotiate yourself? There are auto brokers: they find the car and negotiate with dealers for you. Once your report is ready, Excalibur Credit Solutions managers can refer you to a dealer or broker. But even a broker can find a good rate only with a good report.