Exploring auto loans

As soon as you know your budget, you’ll want to start shopping around for a loan – though some consumers are able to pay cash for their new vehicle, most buyers need financing. Understanding your choices and the loan process will help you save money.

Banks, credit unions, and other lenders are common places to get pre-approved for a loan. Comparing offers will help you get the one that’s right for you.   

What to consider when taking this step:

• Where do I want to look for pre-approvals or financing?
• How long do I want to be paying this auto loan?
• Should I make a down payment to reduce the cost?
• Which lender can get me the best deal?

Banks, credit unions, and nonbank finance options

You can get pre-approved for your auto loan before selecting a vehicle. Check out banks, credit unions, and other lenders. You usually don’t have to have an account with a bank or other lender to get their pre-approval. The exception is credit unions: Generally, you do need to be or become a member of a credit union in order to apply for an auto loan.

A pre-approval will include a loan quote with an interest rate, loan length, and maximum loan amount based on factors such as your creditworthiness, the terms of the loan, and the type of vehicle you have in mind. The rate you are offered may be negotiable. This quote allows you to compare different lenders’ offers against each other, giving you a stronger hand in negotiations.

Lenders and dealers are not required to offer the best interest rates available. You may be able to save a lot of money over the life of the loan by negotiating the interest rate.

Dealer-arranged financing

With dealer-arranged financing, you obtain financing from a lender through a dealership. The dealer collects information from you and forwards that information to one or more prospective auto lenders. If any of the lenders agree to finance your loan, they may quote a rate to the dealer, 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. Because dealers have discretion to charge you more than the buy rate they receive from a lender, you may be able to negotiate the interest rate the dealer quotes to you.

Use this auto loan worksheet to compare the financing offered through the dealership with the rate and terms of any pre-approval you received from a bank, credit union, or other lender. Because you have pre-approved loan offers in your pocket, you can choose whether to stick with one of them, or ask the dealer to match or beat your best pre-approval. Choose the option that best fits your budget.

“Buy Here Pay Here” dealership financing

Some 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 these loans can be higher, so you may want to consider if the cost of the loan outweighs the benefit of buying the vehicle.

Even if you have poor or no credit, it may be worth seeing if there is a bank, credit union, other lender, or another dealer that is willing to make a loan to you.

Check current auto loan interest rates

You can research rates and loan terms by contacting several banks, credit unions, and other lenders, and look online to find interest rate estimates nationwide and tied to your ZIP code. Some commercial sites will link you to specific lenders and dealers for estimates, so you should be careful about entering your personal information.

Get pre-approved for a loan

Shopping ahead of time will get you ready for negotiating your auto loan and make the process less stressful. Getting pre-approved by multiple lenders can mean that they’ll have to compete for your business. This puts you in a stronger negotiating position for whichever lender you choose. This can help you lower your total cost.

When you’re heading to a bank, credit union, or dealership to get an estimate or quote, make sure to gather all the information you’ll need. Lenders will generally ask for this information in a loan application:

• 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 debts

In addition to giving you more options and power in negotiations, a pre-approval helps you stay within your budget and save time. Pre-approvals allow you to compare interest rates without the pressure you may feel once you are at the dealership, meaning you can focus more attention on factors like your trade-in or auto choice. Once your application is pre-approved, the lender will give you documents to take to the dealership. When you are ready to buy, the dealer will contact your lender to make the arrangements.

Know your rights

A lender cannot discourage or deny your application for credit, or offer different prices or other terms and conditions based on your race, religion, national origin, sex, marital status, age, receipt of public assistance income, or good faith exercise of any right under the Consumer Credit Protection Act.

Should you run into a discriminatory issue, you can submit a complaint with the CFPB online or by calling toll-free at 1-855-411-2372, or with the Federal Trade Commission.

Adapted from this piece by the Consumer Financial Protection Bureau

FOR MORE INSIGHT

On buying a car
Financial steps to take before buying a car (NerdWallet)
Take control of your auto loan: A step-by-step guide (Consumer Financial Protection Bureau)
Know what is negotiable (Consumer Financial Protection Bureau)
Understand how to close the deal (Consumer Financial Protection Bureau)
Auto loan worksheets (Consumer Financial Protection Bureau)
What is the difference between dealer-arranged and bank financing? (Consumer Financial Protection Bureau)
How do I compare loan offers? (Consumer Financial Protection Bureau)

The content on missionmoney.org provides general information and does not constitute legal, tax, accounting, financial, or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information; do not endorse any third-party companies, products, or services described here; and take no liability for your use of this information.