A 2023 Guide to Car Loans: How to Get a Low Rate

If you’re not willing or able to pay cash for the full price of a car purchase, you’ll most likely need a loan to buy a car. But when it comes to auto loan financing, you may not know what your options are, or which is the best lender for you. Especially if you have poor credit, your options may be limited.

We’re here to help you use data to get the lowest interest rates possible on your auto insurance, because when it comes to car loans, it’s all about the bottom line.

The soft credit check will tell the lender your personal credit rating, which will impact your chances of getting approved for a loan, your annual percentage rate (APR) or interest rates, and other crucial factors. We recommend getting preapproved through multiple lenders until you find the best terms. Sometimes, you have to have a specific car in mind to get preapproved. If you don’t get preapproved, there’s no point in applying for a car loan through that lender.

Note that not all lenders offer preapproval. Instead, you’ll have to apply for the loan directly, and the lender will do a hard inquiry (which, again, could affect your credit score).

Make a Down Payment or Trade In a Car

Once you’ve gotten preapproved for a car loan, you can either put a down payment on the car you want directly or trade in your current vehicle.

• Down payment: A down payment is an amount of cash you’ll pay to your seller to cover part of the car’s cost. Lenders prefer down payments because it means less chance of defaulting on loans and, if you do default, more chance of recouping their losses. If you have the cash, we recommend making a down payment for lower monthly payments and total interest paid. Down payments are typically 20 percent of the total value of new cars or 10 percent of the total value of used cars. If you put down less than 20 percent on a new car, you might be “upside down” on your loan eventually, meaning you’ll owe more than the car’s value.
• Trade-in: Another option is to trade in your existing car to the seller in return for an amount of money that can go toward the purchase price of your new car. If you have a valuable vehicle, you can exchange it with your car dealer toward the price of your new car. But how do you find the value of your car before you take it to the dealer for a trade-in? We recommend you use a free tool from Kelley Blue Book (KBB), one of the most trusted names in the auto industry, which has determined the value of vehicles since 1926. On KBB’s website, you’ll input this information about your vehicle:
  • Make
  • Model
  • Vehicle identification number (VIN)
  • License plate
  • Year
  • ZIP code

Then, KBB will tell you its value, taking depreciation into account. You can compare this number to estimates from similar services like Edmunds, Carfax, or Autotrader. However, trade-ins only work for those who don’t have negative equity, meaning you owe more on the car than the trade-in offer. Otherwise, you’ll have to pay the lender the difference. While trade-ins are convenient, you probably won’t get as much for your car as you would if you sold it to a private party.

Choose Direct vs. Dealer Financing

The main types of car loan financing are direct financing — using a financial institution like a bank, credit union, or online lender — and dealer financing, where you pay the dealership directly. With direct financing, you’ll get a loan from a financial institution and pay the dealership for the car in full. Then, you’ll pay the bank in installments. In contrast, with dealer financing, you’ll pay for the car in monthly installments.

Although it’s less convenient, we recommend direct financing so you can shop around for the best rates. With dealer financing, the advertised low interest rates may only apply to those with good credit scores, and you won’t be able to compare rates.³

Dealer financing can work a few different ways.

Dealer-Arranged

• What it is: A dealer will connect you with lending partners such as a bank, acting as the middleman.
• Pros: Dealer-arranged financing is convenient, as you won’t have to find a lender yourself. Plus, you get to benefit from the dealer’s knowledge and supervision.
• Cons: In working with a single dealer, you won’t be able to compare rates from different lenders, so you could end up paying a higher interest rate than necessary. Also, the dealer might charge a fee.

Captive Finance

• What it is: Captive finance is when car manufacturers offer in-house auto loans. For example, Ford and GM have financing divisions that provide their customers with auto loans.
• Pros: Captive auto loan offers often have great promotions, like 0 percent APR.
• Cons: You may only be able to benefit from these great promotions if you have strong credit, so it’s not a good choice for those with subprime credit, which includes everyone with credit scores up to 600.

Buy Here, Pay Here

• What it is: Similar to captive finance, “buy here, pay here” means that you sign up for your auto loan through your car dealership, making the auto dealer and the lender one and the same. The lender will put a device on your car so that they can disable or locate it if you don’t pay the loan.
• Pros: This option is good for those with subprime credit, unlike captive finance.
• Cons: “Buy here, pay here” loans often have the highest interest rates and fees.

With direct financing, you can choose from the following financial institutions.

Bank Financing

• What it is: Instead of going through a dealer, you could get an auto loan through your bank. We recommend getting preapproved for multiple loans from multiple banks and comparing rates.
• Pros: Those with good credit can get low interest rates from banks.
• Cons: Not all banks will finance all cars. Some won’t finance old cars or cars with a lot of mileage, for example.

Credit Union Financing

• What it is: An alternative to banks is credit unions — nonprofit organizations that can provide auto loans.
• Pros: In general, credit unions offer lower interest rates than banks, even if you have poor credit. Credit unions also offer lower fees, in some cases. In June 2021, for example, the average new car rate for a 60-month loan from credit unions was 2.87 percent, compared with 4.78 percent from banks.⁴ Check out the APRs from the Navy Federal Credit Union below.

Or check out rates from the Sidney Federal Credit Union:

• Cons: Compared to credit unions, banks usually have more services available, along with convenient mobile apps and online banking, which credit unions often lack.

Online Lender Financing

• What it is: You can get car loans online.
• Pros: Online lenders make it easy to compare rates and can cover even those with subprime credit. If you have good credit, you could get lower interest rates from online lenders than from banks.
• Cons: Those with bad credit may get higher interest rates. Also, customer service could be questionable, so check the company’s reviews on the Better Business Bureau, Yelp, and other customer review sites.

As you can see, some financing options are ideal for those with subprime credit, while some are better for those with good credit. Do your research beforehand to find the lowest interest rates possible, and make sure to read the loan terms and conditions.

Clearly, there’s no one-size-fits-all refinancing auto loan, so if you have to refinance, make sure your interest rates are low. A good place to start is our list of the best auto loan refinancing.