What are the different ways to buy or finance a car or vehicle?
The most common ways to get an auto loan are through your car dealer or a bank or credit union. Learn the differences and how to compare offers to get the best loan.
Most buyers need to get an auto loan to pay for a car or vehicle. While it may be convenient to get a loan through your dealership, it’s not your only option – and you’ll generally get better interest rates and loan terms by comparing offers between different lenders.
At this stage, it’s important to:
Different sources for auto loan financing
The car shopping process often begins at the dealership. If you need an auto loan, a dealer may offer to arrange financing for you. This is also called indirect auto financing because the dealer is between you and the lender.
What to consider
Once you’ve agreed to buy a car through that dealership, the salesperson will refer you to their finance and insurance department, where they’ll collect your information and forward it to one or more prospective auto loan lenders, which could include banks, credit unions, and nonbank auto finance companies. If a lender agrees to finance your loan, they’ll provide a quote to the dealer, which is known as a “buy rate.” Interest rates through a dealer are generally higher because the rate they offer you is their “buy rate” plus additional interest that compensates them for handling your financing.
Most dealers will generally reach out to roughly five lenders and then choose one loan to present to you. You can ask if there were other offers and whether those had lower interest rates or better terms.
Bank or credit union
You can also go directly through a bank or credit union to finance your car or auto loan. You don’t have to work with the financial institution you bank with or are a member of, so it’s possible to shop around for different interest rates and loan terms. This tends to be the cheaper option because you avoid paying the additional markup to the dealer.
What to consider
The first step is to get preapproved by a bank or other lender. This will give you a loan quote, which will include an interest rate, loan length, and maximum loan amount based on a number of factors, including creditworthiness and terms of the loan. This quote allows you to shop around and compare different offers, including with what a dealer may provide.
Buy Here, Pay Here dealership financing
There are other types of dealers known as “Buy Here, Pay Here” where they finance loans to borrowers with no or poor credit histories. They may also advertise, “No Credit, No Problem.”
What to consider
The interest rate at these types of dealerships tends to be higher. You may want to consider whether the cost of the loan – including the costs you’ll pay over the life of the loan – outweighs the benefits of the vehicle.
Even without a strong credit score or history, it may be worth checking with a bank or credit union to see if you could get a loan with better terms.
Check and compare auto loan interest rates
Regardless of who finances your auto loan, they’ll present you with a proposed interest rate – or how much you’ll pay each year to borrow money – and an APR – or the cost you’ll pay each year in interest as well as fees charged by the lender. Both are expressed as percentages and serve as important measures of the price you’ll pay for financing your auto loan.
You can check and compare auto loan interest rates by getting quotes from different banks and credit unions. You can also research interest rates through online consumer marketplaces or comparison sites, but be aware that your information may be sent to prospective lenders.
Understanding how loan shopping impacts your credit
Shopping early for interest rates allows you to comparison shop so you can get the best rate. This generally has a limited impact on your credit, unless you’re applying for multiple loans over a long period of time. When lenders check your credit, it’s a credit inquiry. If credit inquiries take place within 14 and 45 days, they’re considered one credit inquiry, and they won’t impact your credit.
Know your rights
The Equal Credit Opportunity Act makes it illegal for lenders to consider a number of factors – including race, color, religion, sex, marital status – when deciding whether to offer you a loan or what the terms of that loan will be.
Before you agree to a loan with a lender, they’re also required to provide you with written disclosures that list all of the important terms you’ll be legally bound to pay. These Truth-in-Lending or TILA disclosures provide important information on the costs you’ll pay over the life of the loan, including:
- Annual Percentage Rate
- Finance Charge
- Amount Financed
- Total of Payments
- Total Sale Price
If you have a problem with a financial product or service, you can submit a complaint with the CFPB.