Should I consider an online car loan?

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In a Nutshell

Some online lenders may offer car loans with competitive interest rates to applicants with less-than-stellar credit. But online car loans aren’t always the best option. If you have bad credit, interest rates can be steep.
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Getting an online car loan from the comfort of your couch may sound ideal, but there could be some drawbacks.

Applying for a car loan from an online lender may be convenient, with some lenders offering lower rates than you might find with traditional banks. But not all online car loans are created equal.

Let’s take a deeper look at the pros and cons of car loans from online lenders — and how you can help make sure you’re getting an offer that works well for you.



The benefits of online car loans

Car loans from online lenders can be a good financing option for some, especially those who are short on time or who are looking for lenders who might be willing to work with borrowers with poor credit. Here are some benefits of an online car loan.

Competitive interest rates

Some online auto loan lenders might offer lower interest rates compared to traditional banks. For example, if you have good credit, the APR on a 60-month loan for a new car could be as much as two percentage points higher from a traditional bank than online lender rates. That difference may seem small, but interest can quickly add up.

For example, a $25,000 auto loan with a 60-month term and 3.5% interest rate would result in a monthly payment of about $455. The same loan with a 5% interest rate would require a monthly payment of almost $472. That monthly difference adds up to an extra $1,020 paid on the higher-interest loan over five years.

Some companies, like Credit Karma and myAutoloan.com, allow you to check out various lenders in one place so you can easily compare offers, interest rates and loan terms.

Convenience and speed

Applying for a car loan from an online lender can be quick and convenient. You can apply for a car loan from an online lender regardless of time of day or location — all you need is a computer and internet access. And depending on the lender, you may be able to find out if you’re prequalified within minutes. If you get prequalified, the lender will let you know the estimated loan amount, interest rate and loan term you may be approved for. You must still submit a formal application to be considered for the loan.

More lenders to choose from

Some online lenders might be more willing to work with borrowers with bad credit. But pay close attention to the interest rate and loan terms. Typically, the poorer your credit health, the higher your car loan interest rate.

Some online lender sites feature a car loan calculator that can help you get a sense of what your monthly payment might be based on your credit scores, the amount you want to finance, your preferred loan term and your down payment.

Drawbacks of online car loans

Given their benefits, online car loans could seem like a good choice. But before you apply, here are some things to consider:

Interest rates can vary widely

While the interest rates offered by some online lenders could be lower than what traditional banks offer, rates can still be higher if your credit health is poor. Some online lenders that offer loans to borrowers with bad credit charge APRs that reach 25% or more. This rate is much higher than the average car loan interest rate for subprime borrowers, which was 11.89% for new cars and 16.14% for used cars in the third quarter of 2018, according to a report by Experian.

Some lenders may be unfamiliar

As you research your options, you may come across some online lenders you don’t recognize. Before you provide your personal information to a lender or lending network, do a little digging. Check the Consumer Financial Protection Bureau for any consumer complaints about the company. The Better Business Bureau features complaints as well as consumer reviews.

Tips when shopping for an online car loan

If you want to apply for an auto loan online, here are a few tips to keep in mind as you’re looking for an auto loan.

  1. Shop around. To help identify the best car loan offers for you, you should get quotes from several online lenders. You should also consider getting some quotes from banks or credit unions to compare.
  2. Pay attention to any fees. Auto lenders may charge fees such as a loan origination fee or prepayment penalty — a fee for paying off all or some of your loan early. Be sure to read the fine print so you’re aware of any immediate or potential costs.
  3. Don’t borrow more than you can afford. If you’re using an online lender’s auto loan calculator to estimate the maximum amount you can borrow, make sure that you’re staying within your monthly payment budget. Keep in mind that these calculators may not include fees and taxes. You’ll also want to consider additional costs, such as ongoing maintenance, insurance, vehicle registration and gas when putting together your budget. Establishing a budget for your car purchase and sticking to it can help you make sure you can afford your car loan.

Bottom line

Depending on your financial situation, an online car loan could be a good option. But an online car loan isn’t a one-size-fits-all solution. Take some time to do your research. Even if your time is limited, you can easily and quickly research lenders.

If you’re struggling to get approved or are only being offered hefty interest rates, it could help to consider a smaller loan for a less expensive car. Or you can wait to save for a larger car down payment to reduce the amount you need to borrow. You may also want to focus on building your credit, which might help your chances of approval down the road.


About the author: Liz Knueven is a personal finance writer with a BFA in writing from Savannah College of Art and Design. Liz has been published by Business Insider, Carfax.com and LendingTree. Read more.