While some consumers are able to pay cash for their new vehicle, most consumers use financing. Understanding the loan process and knowing your choices will help you save money.
Know Your Financing Options
You can shop around for auto financing even before you shop for a vehicle. Banks, credit unions, and dealerships are the most common places to finance an auto loan. While shopping for auto loans is complicated, finding and comparing your choices can help you improve the deal that you will get. Consider getting one or more loan quotes from a bank, credit union, or another lender before going to the dealership. It will put you in a better bargaining position and could save you hundreds or even thousands of dollars over the life of your loan.
Auto loans from a bank, credit union, or nonbank auto finance companies
You can obtain a quote or pre-approval on an auto loan from a bank, credit union, or another lender before selecting a vehicle. Although it might be helpful if you already have an established relationship with a lender, you don’t have to have an account with these lenders in order to apply for an auto loan. These lenders can “preapprove” you. The preapproval will give you a loan quote with an interest rate, loan length, and maximum loan amount based on your creditworthiness, the terms of the loan, and the type of vehicle you have in mind. The rate and terms you are offered may be negotiable.
Here you obtain financing from a lender through a dealership. With dealer arranged financing, the dealer collects information from you and forwards that information to one or more prospective auto lenders. If the lender(s) agrees to finance your loan, they may authorize or quote a rate to the dealer to finance the loan, referred to as the buy rate.
The interest rate that you negotiate with the dealer may be higher than the buy rate because it may include an amount that compensates the dealer for handling the financing. Dealers may have the discretion to charge you more than the buy rate they receive from a lender, so you may be able to negotiate the interest rate the dealer quotes to you. Ask or negotiate for a loan with better terms. After the auto purchase is finalized, a dealer-arranged loan may then be sold to a lender who has already indicated a willingness to extend the credit. That lender may own your loan and collect the monthly payments, or transfer those responsibilities and rights to other companies.
"Buy Here Pay Here" dealership financing
Some types of dealerships finance auto loans “in-house” to borrowers with no credit or poor credit. At “Buy Here Pay Here” dealerships, you might see signs with messages like “No Credit, No Problem!” The interest rate on loans from these dealerships can be higher than loans from a bank, credit union, or another type of lender. You may want to consider whether the cost of the loan outweighs the benefit of buying the vehicle. Even if you have poor or no credit, it may be worth it to see if there is a bank, credit union, other lenders, or another dealer that is willing to make a loan to you. A feature of this type of dealership is that your monthly payment is made to the dealership. Some “Buy Here Pay Here” dealerships, and some other lenders that lend to people with no credit or poor credit may put devices in the vehicle that help them repossess or disable the vehicle if you miss a payment.
Shop for Your Loan
Shopping for loans and trying to get the best rates and other terms, while complicated, is like other types of comparison shopping. Shopping ahead of time will get you ready for negotiating your auto loan and make the process less stressful.
Prepare before you apply for an auto loan You will be in a better position to shop and bargain for an auto loan if you follow these steps before you apply for a loan.
Check your credit report
The information in your credit report determines your credit scores. Your credit score plays a large part in determining what kind of auto loan you can get, and how much interest you will pay for the loan. Here are some helpful resources:
- To get a free copy of your credit report annually from each of the three nationwide credit reporting agencies visit annualcreditreport.com.
- To learn how to check your credit report for errors and dispute any errors that you find visit consumerfinance.gov.
- To learn about credit reports and credit scores, visit consumerfinance.gov.
Check current auto loan interest rates
You can research rates by contacting several banks, credit unions, or other lenders. You can also look online at many commercial sites which may give you an estimate of interest rates nationwide and by your zip code. Some commercial sites will link you to specific lenders and dealers for estimates, so you may want to be careful about entering your personal information.
Consider a down payment
A down payment will reduce the total amount that you finance because you will have to borrow less money. The larger the down payment, the lower the total cost of the loan.
Decide if you want to trade in your current vehicle
If you already own a vehicle, research its value to see how much you might get from a trade-in or private sale. You can look up the approximate value using online commercial websites such as Consumer Reports, Edmunds, Kelley Blue Book, NADA Guides, and online classifieds. These resources may also be available at your local library. Finding examples of similar vehicles that have sold recently in your area will help you know a fair price.
Once you know approximately how much your current vehicle is worth, you can decide whether to trade it in or sell it yourself. If you trade it in at a dealership, you and the dealer will decide on the value that will be credited towards the purchase price of your next vehicle. If you sell it yourself, you can use the money you get as a down payment.
If you have an existing auto loan on your trade-in, consider your situation carefully
Carefully consider whether to take on new debt in addition to your existing debt. Here are some considerations and steps:
Get the payoff amount, which is the amount to pay off the existing loan, from your current lender before going to the dealership.
Decide if you are going to pay off your existing loan now, wait until you pay off your old auto loan before you borrow for another vehicle, or include the amount that you still owe on your current vehicle in your new auto loan.
If you owe more on your current vehicle than it is worth — referred to as being upside down — then you have negative equity. If you roll the balance of your existing auto loan into your new auto loan, this could make the new auto loan much more expensive. Your total loan cost will be higher because you will be borrowing more than just the price of your new vehicle.
After you research your trade-in’s value, if the amount you still owe on your trade-in is less than it is worth, make sure during any negotiations that you consider whether you are getting fair value for your trade-in and you are able to fully pay off the old auto loan.
Gather your personal information
When you’re heading over to a bank, credit union, or dealership make sure to gather all the information you will need. Lenders will generally ask for this information in a loan application:
Name | Social Security Number | Date of birth | Current and previous address(es) and length of stay
Current and previous employer(s) and length of employment | Occupation | Sources of income
Total gross monthly income | Financial information on current credit accounts, including other debts
Understand how shopping for a loan impacts your credit score
Shopping for the best deal on an auto loan will generally have little to no impact on your credit score(s). The benefit of shopping will far outweigh any impact on your credit. In some cases, applying for multiple loans over a long period of time can lower your credit score(s). Depending on the credit scoring model used, generally, any requests or inquiries by these lenders for your credit score(s) that took place within a time span ranging from 14 days to 45 days will only count as a single inquiry. This means shopping around for an auto loan during that time span will count the same as applying for just one loan. You can minimize any negative impact on your credit score by doing all your rate shopping in a short amount of time.
Getting a preapproved loan offer or quote with a maximum loan amount and rate from a bank, credit union, or other lender is a good place to start. If you bring a loan quote from a lender to the dealer, you may be in a stronger bargaining position to get a better deal, whether you stick with the offer you brought in or you decide to accept the dealer’s financing offer.
Preapproval also helps you stay within your budget and allows you to compare interest rates without the time pressure you may feel once you are at the dealership. Then at the dealership, you can focus more on the actual price of the vehicle and your trade-in because you will already know about the loan terms that you could get. You will still have the choice to negotiate a better loan at the dealership and not use your preapproval.
If your application is preapproved, the lender will give you documents to take to the dealership. Once you are ready to buy, the dealer will make the final arrangements with your lender.
As soon as you drive a new car off the dealership lot, it instantly becomes a used car and its value continues to decrease. While the value of your car drops immediately and will continue to depreciate over time, what you owe on your loan drops more gradually. If you owe more money for your car than what you can sell it for, then you have negative equity.
Avoid losing money from your negative equity by following these simple tips:
- Buy a car that you can afford. If your monthly auto loan payments are too high, you may decide to sell the car before it’s been paid off completely.
- Keep your car until it is paid off completely.
- Pay off your loan sooner by choosing a shorter loan or overpaying the monthly amount, if allowed.
- Make the largest down payment you can. This will help offset the effect of depreciation and start giving you some positive equity.
Additional Learning Resources
Understanding Car Loans
This short, interactive learning course from USSFCU's Best Life Learning Center, reviews the steps, options, and resources involved in the auto financing process.
Take Control of Your Auto Loan
Take Control of Your Auto Loan, a step-by-step guide from the Consumer Financial Protection Bureau contains more information on automobile financing.
The Benefits of Preapproval
Arranging to finance first can help you avoid overpaying for your car. Here are five reasons to line up a loan before visiting a car dealer
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