Find the best financing for your dream wheels and your budget.
When you’ve got your eye on a car, it’s easy to leave the financing for later. But understanding how it works can get you on the road faster — and help you save.
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Three more top car loan options
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Best for guidance through the borrowing process
- Starting APR: 1.85%
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- Loan amount varies by lender
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Car loan basics
Six common types of car loans
Most lenders offer a combination of the following types of lending:
- New car loans. These fixed-term loans from a lender or dealership are used to cover the cost of your new car.
- Used car loans. Similar to new car loans, these loans factor in your previously owned car’s mileage and age when determining your rate and term.
- Private-party car loans. Term loans from lenders that allow you to buy a car from a private seller — rather than a dealership.
- Lease buyouts. Fell in love with a car you’re leasing? This financing allows you to pay for the bubble fee at the end of your lease so that you can purchase it outright.
- Auto refinancing. Trade in your existing car loan to reduce your monthly payments or pay it off more quickly.
- Buy-here-pay-here loans. This last-ditch option helps people with poor credit avoid a hard pull on their report by financing their car directly through a dealership — but often with high interest rates and hidden add-ons.
New vs. used cars: Which is better to buy?
It might sound like a no-brainer: Used cars are cheaper than a vehicle hot off the assembly line and stay around the same value. You may have heard that the value of a new car drops by 20% as soon as you drive it off the lot. But there are a few advantages that new cars have over their older counterparts.
New car advantages
- Minimal maintenance. You probably won’t have to replace any parts for some time to keep your car running the way it should.
- Easier to find. You don’t have to do nearly as much digging when you’re looking for a new car.
- Up-to-date tech. New cars come with the latest safety features and sound systems that used cars just don’t have.
- Longer warranty. New cars typically come with a warranty that covers any repairs over the first three years or 36,000 miles.
- Manufacturer deals. Sometimes car manufacturers will cover part of the price to move less popular models off of the lot, meaning you might still be able to find a good deal even if you buy a new car.
Used car advantages
- Slower depreciation. Used cars don’t lose value nearly as fast as used cars — you might be able to resell after a few years it for only a couple thousand less than the price you paid.
- Lower upfront cost. Because the value of a new car goes down so fast, a used car in prime condition often costs significantly less than a new model.
- Cheaper car insurance. Car insurance premiums are typically based on the value of your vehicle, which is lower on a new car.
- Less expensive to register. The cost of registering a car also decreases every year that someone is driving it around.
- More reliable than you might expect. Cars typically don’t need any major maintenance until they have at least 100,000 miles — far after the 36,000 miles that a new car warranty covers.
Higher interest rates on used car loans
Used cars might be cheaper, but loans tend to come with higher interest rates. That’s because car loans are secured by the value of the vehicle you’re buying. Since used cars are worth less, your collateral isn’t as valuable. This makes lenders see you as more of a risk than a new car buyer, whose collateral is simply worth more.
Lenders tend to give borrowers with more valuable collateral lower interest rates because they stand to gain something more valuable if the borrower can’t pay back their loan.
How much do car loans cost?
When it comes to how much you’ll pay for your car loan, it ultimately comes down to three main factors:
- Interest rate. A percentage of your loan balance charged by your bank or lender and added to the principal amount you owe.
- Fees. Fixed charges tacked on to the cost of your car loan that you pay back along with the rest of your loan. Your loan’s APR is its costs and fees expressed as an percentage.
- Loan term. The amount of time your loan contract gives you to pay off your loan. A short loan term generally results in higher monthly payments but a lower total loan cost.
APR is critical to how much you’ll pay for your car loan, true. But finding a loan term that isn’t too long or too short also affects your overall costs.
Here’s how your monthly payments and total loan cost would look for a $35,000 car loan at 12% APR based on four different repayment lengths:
|24-month term||48-month term||72-month term||84-month term|
Bottom line: The longer your loan term, the more you’ll ultimately pay in interest.
Don’t forget the down payment, taxes and rebates
After your APR and term, you’ll want to pay attention to how much you’ll have to pay up front and in taxes — and ask about any rebates you might be eligible for.
Down payment. How much you’re expected to put down affects the immediate cost of your car loan. Expect to pay 10% to 20% of the cost of your vehicle up front.
Sales tax. Each state requires different sales tax, typically available on your local DMV site. Make sure to factor in sales taxes when estimating the cost of your car.
Rebates. If you’re financing with a dealer, ask about any cash back discounts to avoid leaving money on the table. Three main types include cash rebates, low-interest dealership financing and special leases. Government rebates for low-emission or hybrid vehicles are also available in many states.
The truth about 0% financing
Some dealerships offer interest-free financing, but they’re not always easy to get and not necessarily the best there out there.
It’s a marketing tool. Generally 0% financing is a marketing tool that manufacturers use to bring in customers.
Not everyone is eligible. You need to meet tough credit and income standards to qualify — only around 10% of applicants actually qualify for the 0% rate.
Higher monthly repayments. But it might not be worth it even if you do make it past the credit check. These loans tend to be shorter — often no more than 36 months — translating into high monthly repayments.
Less room to negotiate. This type of financing tends to come with a fixed price and you often can’t qualify for a cash-back rebate.
Your deal might be canceled. You might have to pay full interest if you miss just one payment.
Where can I get a car loan?
Back in the day, your financing options were limited to dealerships and affiliated lenders.
Now you have more options beyond traditional financial institutions, including online upstarts competing for your business.
- Banks. Chances are that your bank offers auto financing or a personal loan you can use to purchase a new car. It’s a relatively hands-off experience, and only applicants with good credit typically qualify.
- Credit unions. Credit Unions often offer financing with lower rates and more lenient credit requirements. But you need to join to qualify, which can add time to the process.
- Online lenders. Online loan companies can offer faster funding for people with damaged credit or new to auto financing. Some can also help you find a car at a dealership.
- Online matching services. Matching services could be an ideal option if you have bad credit, since many offer loans with low or no credit requirements — though it won’t be cheap.
- Dealerships. You can always try to get financing directly from your dealer, though you might need to become a master negotiator to dodge typical dealership tactics.
How can I find the best car loan for me?
Before you compare lenders, calculate how much you can afford to pay for a down payment, monthly repayments, any fees and your loan’s overall cost. Look up your state’s taxes and fees associated with purchasing a car, and add them to the cost of each car you consider.
Banks, credit unions and online lenders often ask borrowers to choose a car before applying. Matching services and dealerships, on the other hand, usually ask you to come with an open mind.
Regardless of where you apply, narrow down makes and models to get an idea of the type of car you can afford. With those two tasks behind you, you’re ready to scrutinize offers to pick the best one.
To get the best car loan, ask yourself these 9 questions:
Click on each question to expand more information about what to look for.
You’ll find that some of this information isn’t readily available online for loan matching services and dealerships. In those cases, it’s worth taking a look at reviews, forums or calling a customer service line to get a ballpark answer.
5 tips to get the best deal on your car loan
- Order your credit report. Before applying, carefully review your credit reports for any mistakes or long-closed accounts that can hurt your score. Clear these up before you apply — a better score usually results in lower rates.
- Compare lenders and dealerships.The only way to find the best deal for someone in your specific situation is to shop around and compare what’s out there.
- Negotiate your price.You can almost always get a better deal on a car if you don’t accept the initial price a dealership offers.
- Don’t fall for the long-term loan.The most popular loan term in the US is 72 months — and it’s also one of the most expensive. Calculate how much you can realistically pay per month and stick to it.
- Read everything you sign. Dealerships sometimes sneak in unnecessary fees or even leave room for renegotiating a higher interest rate.
Buying a car at a dealership? Watch out for extra costs
- Vehicle preparation fee. Dealerships charge this fee to cover the cost of getting your car ready for delivery. You might not have to pay it, unless they’re going beyond a standard car wash.
- Documentation fee. Most dealers charge this fee to cover the cost of processing the paperwork that comes with your new car. Depending on your home state, you might pay a flat $100 fee or a price set by the dealership, which you can negotiate.
- Unnecessary accessories and extended warranties. Didn’t ask for that sound system or paint sealant? See an extra-long warranty in your contract? Unless you actually want it, tell your dealer that won’t pay for it.
Just some of the top car loan providers we review
4 red flags when looking for financingLenders or dealerships advertising any of these three “perks” should ring the alarm bells — or at least prompt deeper research.
- There’s no credit check. Dealerships often don’t run a credit check for buy-here-pay-here loans, but these loans can cost more than one from a reputable lender. Direct lenders advertising no credit check, however, could be a scam.
- It lets you take your car home before approval. This could be the sign of a “spot delivery scam,” where a dealer calls a few days later to announce that financing fell through and you now need to renegotiate your loan at a much higher price.
- It lies about your credit score. Some dealerships con borrowers into paying higher interest by telling them their credit score is worse than it actually is. Yet another reason to check your credit report before comparing lenders.
- It offers 0% financing. You may not pay an APR on your car loan, but you typically aren’t able to negotiate your price or take advantage of rebates. Loan terms also tend to be shorter, sometimes unaffordably so.
Applying for a car loan
How do I know if I’m ready to apply?
You’re ready to apply for a car loan if you:
- Know how much you can afford for a down payment and monthly repayments.
- Know your state’s required taxes and fees.
- Know your credit score.
- Have a few vehicles in mind.
- Have thoroughly compared lenders.
- Are sure you meet your lender’s eligibility requirements — including car insurance.
I’m ready to apply. What do I need to do?
The car loan application process can vary wildly depending on the type of financing you choose. Getting financing from a dealership doesn’t involve most of the steps outlined below, for example — instead, you start at the dealership.
What documents might I need to apply?
Most lenders ask to see at least three documents when you apply for a car loan:
- Your driver’s license. Your lender might ask to see your license or require your license number. Either way, have it on hand.
- Your insurance card. Some lenders require you to have specific car insurance before applying for a loan.
- Employment verification. You might be asked to submit tax returns or recent pay stubs to prove you make enough to afford your car loan.
Worried about how shopping for a car loan might affect your credit score? Don’t be. Credit scoring systems usually count multiple auto loan inquiries within a certain timeframe — typically two weeks — as one.
5 reasons your car loan application was rejected
Bad credit. The preapproval process for many lenders is a soft credit check only.
How to avoid it: Know your credit score and your lender’s credit requirements before applying.
Paperwork mistakes. Missing or incorrect information on your application can land you in the rejection pile.
How to avoid it: Carefully review your application before submitting it. Bonus points if you get someone else to look it over too.
A recent financial catastrophe. Foreclosure, tax liens and bankruptcies make you look like a risk to lenders.
How to avoid it: Wait a year or so before all of that is behind you. Waiting not an option? Try a lender that doesn’t have such strict requirements — though it might cost you in higher repayments.
You asked for too much. You can be rejected if your lender doesn’t believe you’re able to repay a loan.
How to avoid it: Only apply for a loan you can prove you can afford — not one you think you can.
Inconsistent income. Unpredictable cash flow is not assuring to a lender that wants to be sure you can pay back a loan.
How to avoid it: Freelancers might try to get a steady part-time gig on the books to show you have at least a reliable base income.
I got my car loan. What happens next?
So, you’ve finalized the deal that got you behind the driver’s seat. Now it’s time to start paying off your car loan. If it’s an option with your lender, set up autopay to save time (and memory space) you would spend making manual repayments each month. Keep track of your personal account and loan balance to make sure everything goes smoothly — sometimes even automated systems make mistakes. Contact customer service if you notice anything off.
Prepaying your car loan: What you need to know
With most loans you can save on interest by paying off your loan early. This isn’t always the case with car loans, however. Some lenders charge with prepayment penalties.
Others (particularly from buy-here-pay-here lenders) give loans with pre-computed interest rate using what is known as the “rule of 78s” formula. These loans front load interest so that borrowers pay around two thirds of their loan’s interest in the first few months.
In some states, it’s illegal to use the rule of 78s to calculate interest on car loans with a term of five years or less, including:
- New Hampshire
- New York
- South Dakota
In both of these cases, you don’t stand to save much by paying off your loan early. You can still lower your debt-to-income ratio, however, which can help you qualify for other forms of financing.
Even if there isn’t a prepayment penalty and your loan comes wth simple interest, be sure to call your lender to ask if there’s a special process for prepayment. Also ask if you can make principal-onot, your prepayment might not make much of a difference.
How does car loan refinancing work?
Car loan refinancing involves taking out a new loan to pay off your old one, usually with lower rates and more favorable terms.
Refinancing with a new lender allows you to rewrite the terms of your loan. You can qualify for a new interest rate. You can lower your monthly repayments by extending your loan term. Or you can save on interest by shortening the amount of time you have to pay it off.
Should I refinance my car loan?
It depends. Done right, refinancing your car loan could save you thousands of dollars in your loan, give your lower monthly repayments or both. But not everyone will be able to get a good deal.
When refinancing is a good idea
- Your credit has improved. Better credit typically translate into better rates.
- You got a raw deal. Believe you could have gotten a better deal with your credit rating? Look into refinancing to see if you can get a better refinancing rate.
- Interest rates are down. If interest rates have taken a drop across the board, it might be a good time to refinance even if your credit hasn’t improved much.
When you should hold off
- Your car is worth less than your loan balance. Lenders are generally not willing to refinance a car loan if it’s upside down — when you have more debt than your car is worth.
- You have prepayment penalties. Refinancing involves repaying your loan early. You might not be able to save much if you have to pay extra fees to get out of your original loan.
- Your loan comes with front-loaded interest. If you paid most of the interest on your car loan in the first few months or years of your loan term, you don’t stand to save much by refinancing.