What’s the best place to get a car loan? The answer varies based on each borrower’s needs, preferences and credit history. The good news is there are a variety of options out there to consider.
Before you sign a contract and drive off the lot, take some time to understand the pros and cons of different auto loan options, including banks, credit unions, online lenders and dealerships. Doing your research on different lenders could help you find the best possible loan offer for you. After all, who doesn’t want a better deal?
There are three common routes you can take when getting your car loan financed by a dealer.
- Dealer-arranged financing
- Captive finance companies
- “Buy-here, pay-here” financing
Dealers often have relationships with banks and other lending institutions. With dealer-arranged financing, the dealer connects you with one of its lending partners, acting as an intermediary in the financing process.
The big advantage of dealer-arranged financing is that it’s incredibly convenient. You don’t have to put any effort into finding a lender. From start to finish, the dealer supervises the process to help you find a loan.
Still, while dealer-arranged financing can simplify the process of finding a loan, you aren’t shopping around across a wide range of lenders to compare rates. This could result in your paying a higher interest rate than you would have if you’d done your own comparison shopping.
Another reason the interest rate may be higher is that lenders may include a fee to compensate the dealer for handling the financing process. As a result, you could wind up paying a higher interest rate than you would have if you’d chosen to deal with the lender directly.
One thing to note: After you buy a car, your loan might end up in the hands of the dealer, a lender or even a third party that purchases your loan. So your car payments could go to a different lender than you originally expected.
Captive finance companies
Many of the larger carmakers have their own in-house financing divisions,
called captive finance companies. Examples include Toyota Financial Services, GM Financial and Ford Credit. These companies may finance new vehicles or manufacturer-backed certified pre-owned cars.
When you’re buying a car at a dealership, the dealer may send your loan application to the captive finance company at the same time it reaches out to other lending partners. If you know the make and model of the car you plan to buy, you may also be able to apply online for a loan from a captive finance company before visiting the dealership.
Captive finance companies sometimes offer appealing promotional incentives, such as 0% APR auto loans. But these deals may only available only to borrowers with strong credit.
‘Buy-here, pay-here’ financing
With “buy-here, pay-here” financing, the auto loan is financed in-house by the car dealership. The lender and the auto dealer are one and the same.
In this car-buying process, the dealership determines whether you’re eligible for a loan and, if so, how much. If you choose a car from the dealership and finalize the loan, payments are typically made directly to the dealership. The lender may place a device on your car that helps it locate or disable your car if you miss a monthly payment.
Buy-here, pay-here financing is often geared toward those with subprime credit. If your credit needs work and you’re struggling to get approved for a car loan, a buy-here, pay-here dealership could provide you an option.
But consider buy-here, pay-here dealerships a last resort. They typically charge the highest interest rates of all lenders out there, and some may also charge a bunch of fees. If you go this route, be sure to read the fine print so you really understand the total cost.
When dealing with banks, you have the opportunity to get preapproved for several car loans, compare rates and identify the best offer for you.
Banks may advertise low or competitive interest rates — but often only offer those to borrowers they define as having “excellent” credit.
Your bank financing options may also be limited by the type of car you want to buy. Some banks won’t finance cars over a certain age or mileage. If you plan to purchase an older used vehicle, you may have difficulty finding a bank that will give you a car loan.
A credit union is a nonprofit organization that returns profits to its members through higher savings rates as well as lower fees and loan rates.
Membership comes with benefits. Credit unions generally offer lower interest rates than banks do. According to the National Credit Union Administration, the average credit union interest rate on a five-year new-car loan in the third quarter of 2018 was 3.37%, while the average rate for the same loan through a bank was 4.93%.
If you have poor credit, a credit union may be more flexible than a bank. Credit unions build relationships with their members that allow them to offer a more personalized experience.
With online lenders, you can easily shop around and evaluate rates and loan terms from the comfort of your living room. In some cases, you can preview offers from various lenders on one site so you can easily compare loans side by side.
As with credit unions, some online lenders may be more willing to work with car shoppers with less-than-perfect credit. But these lenders may offer steep interest rates. Subprime borrowers can get charged interest rates on their car loans that reach as high as 25% or more. On the flip side, if you have good credit, an online lender might offer you a lower interest rate than you could get with a traditional bank.
With online lenders, customer service may vary dramatically from company to company. Research the lender’s customer service history before signing on the dotted line. As with dealerships, banks and credit unions, you should check out reviews on sites such as Yelp, and be sure to check with the Better Business Bureau and Consumer Financial Protection Bureau to see if any complaints have been lodged against the company.
Your financial situation and the type of vehicle you’re purchasing are key factors in determining the type of lender that’s best for you. It’s always a good idea to get several quotes from different types of lenders so you can compare offers and help make sure you’re getting the best rate.
If you can’t qualify for a car loan or are being offered sky-high interest rates, consider getting a co-signer on the loan, saving up for a larger down payment or taking some time to build your credit before your car purchase.