Finding the best auto loan companies is important when you buy a car. Even a difference of a few points on a loan APR can cost you thousands of dollars over the loan’s term.
Knowing the best auto loan companies to use and how to qualify is important if you want the best auto loan available to you.
What is an Auto Loan?
If you can’t pay cash for a car, you need an auto loan or money borrowed to pay for the car. Auto loans are secured loans because you put up the car as collateral. If you default on the loan (usually for more than 90 days) the bank can repossess your car, liquidating it to make back the funds.
Can I get an Auto Loan with Bad Credit? No Credit?
Many people wonder what credit score is needed for an auto loan. There isn’t a cut and dry answer as it varies by lender.
Overall, the higher your credit score, the better the loan terms you’ll get, and of course, the higher your chances of approval.
But can you get an auto loan with bad credit? You can. You may have to jump through a few more hoops and provide more information, but you can usually get a loan if you look for the best auto loans for bad credit. Most lenders view credit scores lower than 669 as ‘fair or poor’ credit.
If you fall into that category, you may need a larger down payment, pay higher interest rates, and/or pay more fees.
If you don’t have any credit, you may still get a loan with either a cosigner or proof of ‘other’ credit lines you may have. For example:
- Utility bills
- Insurance payments
- Rent payments
Any bills you can prove that you pay regularly (and on time), may help lenders find you a suitable auto loan.
What do First-Time Car Buyers Need to Know?
Buying your first car is exciting! But before you sign on the dotted line with the auto loan lender, you should know the following:
- Know your credit score or at least your credit history – Look at your credit report (free access here) and look at your history. Do you pay your bills on time? Are your outstanding credit card balances reasonable? Is all information accurate?
This sets you up for a good credit score. If you want to know your actual score, check with your bank or credit card companies. Most offer free access to your credit score monthly. It won’t be exactly what lenders see, but it’s a close estimate.
The higher your credit score is, the better loan terms you’ll get and the more options you’ll have. But if you search for the best auto loans for bad credit, you’ll find you have options there too.
- Save for a down payment – If you invest in the car, you’ll have a better chance of loan approval. Lenders prefer ‘skin in the game’ or you investing some of your own capital. This makes you more likely to make your payments on time.
There isn’t a minimum down payment required across the board. Each lender and situation differs. The more money you have to put down, though, the better your chances of securing a good loan.
- Interest rates vary based on your credit score and loan term – We already discussed how a lower credit score results in a higher interest rate, but the loan term factors in too. The longer you borrow the funds, the higher the risk a lender takes. For example, a 60-month loan usually has a higher APR than a 36-month loan because of the longer term.
- Shop for auto loans within a short window – Always shop around for the best interest rates, but do it quickly. The credit bureaus only hit you for one inquiry when you comparison shop within a 2 to 3 week period.
What is a Good Interest Rate on a Car Loan?
Good interest rates on car loans vary widely. Not only does it depend on your credit score and down payment, but also the type of car you buy.
Let’s look at how different factors affect your car loan APR rates:
- Your credit score has the largest effect. If you have a poor credit score, you're more likely to pay 10% more than someone with great credit.
- The loan’s term matters too. Borrow money to buy a car for as short of a period as you can afford. Don’t take on a loan you can’t afford, but also don’t extend it just to get the lower payment if you can afford more. You’ll pay higher interest rates just for the longer term even with great credit.
- The more money you put down the less interest you’ll pay. Lenders like you to take on some of the risk. If you do, they’ll offer you a lower APR than if you put less money down.
- Buying a new car usually has a lower APR than used cars. Lenders view used car purchases as ‘riskier’ for two reasons. One, they can’t be sure of the car’s exact value, which heightens the risk. Historically, used car buyers are also more likely to default on their loans.
- The car’s make and model plays a role too. Some cars are riskier (higher risk of theft) or a lower resale value than other cars, resulting in a higher APR to make up for the risk.
The bottom line here is that you can have great credit, but still pay a higher interest rate because of other factors. Buying a used car, taking a long loan term, or buying a ‘risky’ make and model may affect the car loan APR rates more than your good credit can help it.
How can I Apply for an Auto Loan?
Once you’re ready, applying for an auto loan is easy. Before you do, take the following steps:
- Check your credit and make any improvements necessary to maximize your credit score as much as possible
- Determine how much money you can put down
- Get your income documents and bank statements organized and ready to provide to the lender
- Know how much you can afford by checking your budget before applying
When you’re ready to apply, check with multiple lenders. Don’t take the first offer provided, even (or especially) if it’s from the dealer. Look around to see what options you have. If you secure auto financing outside of the dealership, you’re basically a cash buyer. This may give you more negotiating power when you are ready to buy the car.
The auto loan application is simple and straightforward. Provide your information and proof of your qualifications and you’ll see what you qualify for.
Get Pre-Approved Before you Shop for a Car
It may seem backward but shop for an auto loan before you shop for a car. Without knowing how much you qualify for, you may shop outside of your budget.
Knowing what you can afford and what terms lenders will offer, plays an important role in the car buying process. Not only will you know what you can afford, but you’ll see what options you have.
If you find that lenders aren’t quoting affordable interest rates, take the time to see how you can improve your situation. Can you fix your credit score by getting current on your debts or paying them off? Are there errors on your credit score you can dispute?
Can you save for a higher down payment or buy a less ‘risky’ car? These are just a few things to ask yourself to get the best car loan APR.
Is it Best to Finance a Car Through a Bank or Dealership?
It’s always better to get quotes from both banks and dealerships, but most often, you’ll find the best rates from banks or online lenders.
Dealers are in it to make money. They make money on the car itself, but they also want to earn money on financing – the more the better. When you shop with a bank or online lender, you have a better chance of securing more attractive rates because they have less overhead.
Shop for the Best Auto Loan Companies Today
Don’t settle for any auto loan – know what you’re getting. Pay attention to the APR, term, and fees. Shop around to find the lender with the best options for you and if you can’t get terms you like, see how you can improve your chances of securing a loan by improving your qualifying factors.
You don’t have to secure a loan from a dealership or even your local bank. Today there are hundreds of options to apply for a car loan online. You can even apply from the comfort of your own home. Find out what you qualify for and get the car loan you can afford.