Best Place to Get a Car Loan

Aside from a house, a car is one of the biggest purchases you’ll ever make. Most of us don’t have thousands of dollars lying around to pay off this investment in full. Thus, you’ll likely have to take advantage of auto financing. The good news is that you’re not alone, as many drivers rely on lenders ranging from dealerships and online providers to banks and credit unions.

Especially if you have a decent credit score, obtaining a car loan is usually pretty easy. The tricky part is choosing the ideal lender. Whether a dealership or traditional loan provider is right for you depends on factors like your credit score, your ideal length for a loan term, and how much money you can put down.

Which lender you choose is arguably just as important as deciding which car to buy. You need a provider that can offer competitive auto loan rates and limited fees to fund your new or used car. This way, you can drive your new car knowing you can make your payments on time and keep your financing as affordable as possible.

While it’s easy to get excited about buying a new car, consider researching auto financing options in addition to the latest makes and models. Comparing multiple lenders will help you secure ideal loan terms and affordable interest rates. By knowing what to look for in a provider and reviewing the pros and cons of various options, you’ll discover the best place to get a car loan based on your unique situation.

Car Dealership

Many car buyers use dealership auto loans to finance their new vehicles. The three main types are as follows, but be sure to ask your dealership which options are available to you:

Dealership Financing

It’s common for a car dealership to partner with third-party lenders. When you opt for dealer-arranged financing, the dealership serves as an intermediary between you and a bank, credit union, or other lending institution. This type of financing simplifies the process of finding a loan by allowing the dealership to take care of the entire process.

It’s worth noting that dealer-arranged financing often requires you to pay for the convenience it provides. Lenders will often compensate your dealership for serving as an intermediary and pass the cost along to you. Additionally, you’ll miss the opportunity to do your own comparison to find the most affordable interest rate. However, many people don’t mind paying a little extra for the simplicity that dealer-arranged financing provides.

Captive Finance Companies

Because auto manufacturers want consumers to be able to easily purchase their vehicles, many brands have their own financing departments. Some examples of these departments, also known as captive finance companies, include Ford Credit, Honda Financial Services, and Toyota Financial Services.

When you buy a car, your dealership might send your loan application to its captive finance company. Alternatively, you can apply online before going to the dealership as long as you indicate the make and model of the vehicle you want.

Captive finance companies are an attractive financing option because of promotional deals. In some cases, you can take advantage of APRs (annual percentage rates) as low as 0 percent. Be aware that this type of financing is usually only available to borrowers who meet a specified minimum credit score.

Buy-Here, Pay-Here Financing

Buy-here, pay-here financing involves the car dealership serving as an independent lender. The dealership calculates how much risk you pose as a borrower and uses its analysis to determine your loan terms. Over the course of your loan, you’ll make fixed monthly payments directly to the dealership. It’s common for the dealership to install a device that locates or disables your car if you fall behind on payments.

Note that this type of lending often appeals to those with poor credit. Dealerships tend to charge higher interest rates and additional fees to compensate for these riskier borrowers. As long as you read the fine print of your loan agreement, you can determine whether the terms are agreeable to your situation.

Banks

When people need to lend money from a financial institution, their first thought is often to go to a bank. As you might’ve expected, banks can help provide you with the funding you need to buy a new or used car. Banks tend to offer low interest rates to borrowers who meet a specified minimum credit score.

These institutions also offer other incentives, such as discounts, when you sign up to make automatic payments from your account. Note that a bank might refuse to provide a loan offer if you’re buying a certain type of car. For instance, many institutions won’t finance vehicles that exceed a certain age or mileage.

Which Banks Offer Affordable Car Loan Rates?

Below is an overview of two national banks with some of the most affordable car loan rates. You can also research rates from other national banks or choose a local or regional institution that might offer better auto loan interest rates.

Bank of America

Bank of America has auto loans with fixed APRs as low as 4.34 percent and 4.54 percent for new and used car purchases from dealerships, respectively. If you want to buy a vehicle you’re already leasing from a dealership, take advantage of Bank of America’s 5.19 percent APR for lease buyout loans. Preferred Rewards members can get up to a 0.50 percent discount on their interest rates.

U.S. Bank

U.S. Bank is another reliable lender with some of the best car loan rates. Apply for preapproval to use at participating dealerships and unlock an APR as low as 4.74 percent for up to sixty months. If you refinance an auto loan, you can benefit from an APR as low as 5.29 percent for up to thirty-six months.

Should You Get an Auto Loan From Your Bank or the Dealership?

Though there are other auto loan options available, you might wonder if it’s better to get a car loan from your bank or the dealership since we’ve already discussed these two types of financing. We don’t have a definitive answer, as the right type of financing will largely depend on your situation.

For instance, imagine you have an excellent credit score. Your positive borrowing history qualifies you for low interest rates from banks. If you want to make the lending process a little easier, consider going through a captive loan company at your dealership. A team of financial experts will take care of everything while still providing you with competitive auto loan rates.

Alternatively, you might opt for dealership financing if you have bad credit. Dealerships usually have higher interest rates but are less selective when determining a borrower’s eligibility. Though you’ll end up paying a little more, you’ll appreciate the convenience of options like dealer-arranged financing and buy here, pay here borrowing.

Credit Unions

A credit union differs from a bank in that it’s a nonprofit instead of a for-profit institution, but it offers many of the same services as a bank. Credit unions provide checking accounts, saving accounts, and, of course, auto loans. Because its members who use these various services are the owners instead of shareholders, a credit union tends to provide lower interest rates. A credit union even offers more eligibility flexibility than a bank, meaning this institution is a desirable option if you have a low credit score.

Which Credit Unions Offer Affordable Car Loans?

Here are some of the most popular national credit unions among consumers looking for affordable car loans. In addition to reviewing these rates, consider shopping around. You might be able to find another federal credit union or local credit union with a lower APR.

Consumers Credit Union

Though Consumers Credit Union is an Illinois-based credit union, membership is available to people across the country. Credit union consumers can take advantage of auto loan rates as low as 3.49 percent APR. Other benefits include the ability to finance 100 percent of your purchase, mechanical repair coverage with 24-hour emergency service, and only having to pay interest on your unpaid balance. Additionally, members can qualify for a rate reduction of up to 0.25 percent.

Pentagon Federal Credit Union

Pentagon Federal Credit Union, also known as PenFed Credit Union, serves credit union consumers in all fifty states. Rates are as low as 4.44 percent APR up to 36 months. Pentagon Federal Credit Union offers products ranging from used and new car loans to refinance loans. Other products from this federal credit union include Gap protection, debt protection, and extended warranties for your vehicle.

Online Lenders

Another option to obtain auto financing is through online lenders. These lenders readily advertise their products, making it easy for you to compare rates from the comfort of your home. Some sites even allow you to view loan terms from multiple lenders all on one page.

Online lenders are particularly enticing to those with bad credit, as these companies tend to be more forgiving when determining borrowing eligibility. Know that an online lender may charge less-than-ideal borrowers interest rates as high as 25 percent or more, so take the time to shop around. On the flip side, online lenders reward borrowers with good credit by offering ideal interest rates. The APR from an online lender might even be within the credit union APR range.

Examples of Online Lenders for Auto Loans

One example of an online lender is LightStream, which offers low fixed rates as low as 3.99 percent APR for new cars. In addition to financing used cars and offering refinance loans, LightStream helps fund classic car purchases.

Another example of an online lender is Carvana. Though this site is unlike a traditional dealership in that it sells used cars online, it has a financing department for its consumers. You can use Carvana’s auto loan calculator to determine what rates you’re eligible for. Though consumers with good credit access the lowest APRs, Carvana can qualify you for financing regardless of your credit history.

What Lender Has the Best Auto Loan Rates?

It’s hard to say what lender has the best auto loan rates, as it largely depends on your financial situation. For instance, a lender might advertise a low APR you might not be eligible for because of bad credit. If you have a less-than-stellar credit score, dealerships, credit unions, or online lenders will probably work best. You might have to pay more in interest, but it’s better to qualify for these offers than none at all. Those with better credit tend to get the best auto loan rates from banks.

Note that a good auto loan goes beyond its interest rates. You’ll want an offer that allows you to pay back the amount on your own terms. For instance, you might ask for lower monthly payments to keep your budget in check. Higher monthly payments are ideal for those who want to get out of debt faster.

Additionally, consider what fees the lender has. Hidden fees might offset the benefits of a loan’s APR. Finally, you’ll want to consider how reputable the lender is. Institutions with good ratings from the Consumer Financial Protection Bureau and Better Business Bureau are often safe bets.

What’s the Easiest Place to Get a Car Loan?

If you’ve received constant rejections for car loans, you might wonder where the easiest place to get one is. Credit unions often cater their finance packages to consumers with poor credit scores. You can also find accessible financing through dealerships and online lenders, though you should expect higher interest rates. Banks tend to be more exclusive when offering loans, as they want consumers with strong credit scores.

What Is a Good Auto Loan Rate?

The definition of a good auto loan rate depends on various factors, the main one being your credit score. Experian reports that consumers with a FICO credit score of 720 or higher paid an average rate of 3.65 percent for new cars. Those with a credit score below 579 averaged a rate of 14.39 percent for new cars. In short, you’ll want to keep your credit as high as possible to get a reasonable rate.

What to Know When Applying for Auto Loans

Regardless of what lender you choose, you can improve your auto loan terms by learning more about these agreements. Here are some key things to know that can give you leverage when negotiating with dealerships, banks, credit unions, and online lenders:

How an Auto Loan Works

First, let’s discuss how an auto loan works. It’s a type of personal loan that uses your vehicle as collateral and gives you the money you need to fund your car purchase. It’s the ideal solution for a consumer who can’t pay for their vehicle in full when they initially purchase it. The consumer can use their car as they pay back the lender according to their contract’s terms. At the end of the loan period, the borrower will make the final payment and have 100 percent ownership of the vehicle.

Terms and Conditions

Every auto loan comes with terms and conditions. Though it’s easy to get caught up in the excitement of buying a new vehicle, be sure to read your agreement before signing. You should thoroughly understand everything, from what you owe each month to how to make payments to the lender. Your terms and conditions will also specify the interest rate, term length, and applicable fees.

APRs vs. Interest Rates

Of course, a lender isn’t going to give you the money you need to buy your car for free. Institutions make money by charging borrowers a percentage of the total amount they want to borrow. The interest rate is the amount the lender charges you, though an APR might be a more accurate representation of what you’ll end up owing. The APR considers fees in addition to the interest rate and offers a standardized way to compare rates from different providers.

Down Payment

Many lenders will require borrowers to make down payments before providing them with loan offers. A down payment is an initial payment for a large transaction before financing kicks in. Borrowers often opt to make down payments, as it can shorten the length of a loan term and qualify them for a lower interest rate. From a lender’s perspective, a down payment is beneficial because it provides capital and protects the lender in case the borrower defaults.

Fees

If a lender’s APR seems too good to be true, consider doing some more research to uncover fees. Noticing fees can help you realize that a seemingly attractive auto loan isn’t as reasonable as you thought it was. For instance, some lenders implement penalties if you pay off your loan early. These charges can quickly add up or trap you into a longer-than-necessary loan term.

Credit Score Requirements and Other Eligibility Stipulations

Lending institutions typically favor borrowers with good credit scores. A history of paying back lenders indicates that the borrower is less likely to default on their loan. Even if a lender is willing to give you a loan offer, your credit score might not be high enough to qualify you for the advertised minimum loan rate. Thus, borrowers should shop around to ensure they get the best deal.

Aside from credit score requirements, lenders have other eligibility stipulations. For instance, they might require you to make a minimum down payment to prove your commitment to the loan and provide you with lower APRs. You might also have to provide proof of a specified income amount to demonstrate your ability to make payments on time. Additionally, lenders often implement insurance requirements to protect the asset and secure the loan in case of default. Insurance stipulations vary by lender, but most institutions require you to obtain a full coverage policy that combines collision, liability, and comprehensive insurance.

How to Apply for Auto Financing When Buying Privately

Many people rely on dealerships when they go car shopping because of their vast inventories and certified pre-owned programs. However, you might want to go through a private seller to obtain a specific model or avoid dealership fees. Though used cars from private sellers tend to be cheaper, you’ll likely still need financing to make payments more manageable.

Fortunately, you can apply for auto financing when you buy privately. Banks, credit unions, and other lending institutions offer popular finance products known as private party loans. The lender verifies your eligibility as a borrower by determining whether you meet its specified minimum credit score and income requirements.

If you qualify, the lender will pay the amount you owe to the private seller or lienholder. Then you’ll make payments to the lender every month to repay them the amount you owe plus interest. Private party loans help you expand your options when car shopping, but be sure to shop around to find the most affordable rate.

How to Qualify for Better Auto Loans

Looking for an institution that caters to your unique financial situation is one of the best ways to secure a better auto loan. Note that you also have the power to change your circumstances and obtain an ideal offer regardless of the lender you choose. Below are some expert tips for qualifying for better terms:

Improve Your Credit Score

Improving your credit score comes with tons of benefits, so there’s no reason not to pursue this endeavor. You’ll find it easier to rent an apartment, buy a home, qualify for lower credit card interest, and, yes, obtain better auto loans. Bouncing back from a low credit score might seem challenging, but it’s far from impossible.

Start by pulling your credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion. Fair credit borrowers can review items to determine what is helping or hurting their scores. You might even notice errors that you can fix by contacting the agency.

You can also improve your score by budgeting accordingly so you can pay off your debt as fast as possible. Additionally, you can lower your credit utilization by spreading out payments across accounts or requesting a higher credit limit. Other effective strategies include limiting your requests for hard inquiries and keeping old accounts open to improve the age-of-credit portion of your score.

Maximize Your Down Payment

Your down payment is what you pay to the lender upfront. The more money you can put down, the better. One reason you’ll want to fork over more money in the beginning is that it can qualify you for lower interest rates.

Lenders are often willing to reward dedicated consumers with competitive APRs. Another reason a bigger down payment is beneficial is that it can help you shorten the length of your loan. Paying off your loan quicker allows you to enjoy the satisfaction of driving your car debt-free.

Of course, making a bigger down payment is easier said than done. If you don’t plan on buying a vehicle for a while, spend the next several months building your savings. Those who need to purchase a car more urgently might consider trading in their old vehicle. The equity in your vehicle unlocks cash from dealerships or private buyers, meaning you won’t have to dip into your savings as much or even at all to make a sizable down payment.

Request the Ideal Loan Period

Most lending institutions are flexible in their loan periods, giving you the freedom to determine how slowly or quickly you want to pay back the amount you borrowed. Car loans are typically available in twelve-month increments and can last anywhere from two to eight years.

A shorter loan term is ideal for paying less overall, but your monthly payments will be higher. You can ask for a shorter term to maximize savings. Alternatively, a longer loan term requires you to pay less per month, but more overall. Longer terms are ideal for consumers who can’t afford high monthly payments.

Consider Whether You Want to Buy a New or Used Vehicle

Because new vehicles are usually more expensive than older vehicles, the latest and greatest model will cost you more. However, you might actually get a better deal by buying a new car. Used car loans tend to come with higher interest rates, meaning you get less bang for your buck. Ultimately, it’s up to you to decide if you want the higher cost of a new car with lower interest or the lower cost of a used car with higher interest.

Apply for Preapproval

Some consumers are hesitant to apply for preapproval because they believe it commits them to a car loan. However, it’s important to note that these programs simply state how much the institution will loan you and specifies the expected interest rate. The offer is valid for a certain window, allowing you to secure a rate as you continue shopping around. Preapproval helps make your time at the dealership less stressful, as you can use it as leverage during negotiations.

What to Know About Auto Loan Refinancing

Perhaps you didn’t consult this guide before choosing a lender. What once seemed like a favorable auto loan has turned into high monthly payments, excessive fees, and other unfavorable terms. Fortunately, you don’t have to wait it out until the end of your term.

Many lenders offer auto loan refinancing to help you save over the life of your loan. It essentially involves taking out a new loan to pay off the old loan. If you find the right lender, you can qualify for lower interest rates and lower monthly payments. Like with first-time auto loans, it’s important to shop around for the best refinancing deal.

Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.