Published: May 23, 2022Updated: August 1, 2022

A 2022 Guide to Car Loans: How to Get a Low Rate

Calculate exactly how much you’ll pay monthly.

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.

How to Buy Car Loans

Here, we’ll explain the process of buying car loans from start to finish.

Ask Questions

Whether you’re dealing with a bank, a credit union, or an online lender, make sure to ask the following questions when shopping for auto insurance:

  • What is the interest rate?
  • How often is the interest rate compounded?
  • If I miss a payment, will the interest rate increase?
  • How much is the down payment?
  • What are the loan’s repayment terms?

How to buy car loans

Gather the Information You’ll Need

When you’re approaching a lender to negotiate a car loan, make sure you have the following information handy:

  • Your credit score or FICO score from a credit reporting agency
  • W-2 or recent pay stub
  • Government ID and proof of residence (often a driver’s license, utility bill, etc.)

The lender will want to verify your employment, home address, and credit score. Using this information, you can get preapproved for a car loan, which we’ll detail below.

If you’re wondering how much auto loans cost in general, here’s a sample from the second quarter of 2021.1

Type of car Honda CR-V Chevrolet Silverado 1500 Honda Civic
Average loan amount $26,082 $37,992 $22,916
Average monthly payment $453 $605 $398
Average term length (in months) 63 73 66
Average APR 3.22 5.14 4.55
Average credit score 751 725 710

Once you have a general idea of how much you should be paying for your car loan, it’s time to get preapproved.

Get Preapproved

Before you even buy a car, you can get preapproved for a loan from a traditional bank, credit union, or online lender. You can get preapproved online or over the phone with most lenders.

Lender Type of lender URL Phone number
Chase Traditional bank https://www.chase.com/auto/prequalified 800-336-6675
Wells Fargo Traditional bank https://www.wellsfargo.com/auto-loans/ 800-289-8004
Bank of America Traditional bank https://www.bankofamerica.com/auto-loans/ 844-892-6002 for new customers, 800-215-6195 for existing customers
Citigroup Traditional bank https://online.citi.com/US/ag/current-interest-rates/personal-loans-and-lines-of-credit 877-362-9100
PNC Traditional bank https://www.pnc.com/en/personal-banking/borrowing/auto-loans.html 877-CALL-PNC
Navy Federal Credit Union Credit union https://www.navyfederal.org/loans-cards/auto-loans/auto-learning-center/preapproval.html 888-842-6328
State Employees’ Credit Union Credit union https://www.ncsecu.org/AutoLoans/VehicleLoans.html 888-732-8562
Pentagon Federal Credit Union Credit union https://www.penfed.org/auto 800-247-5626
BECU Credit union https://www.becu.org/loans-and-mortgages/auto 800-233-2328
SchoolsFirst Federal Credit Union Credit union https://www.schoolsfirstfcu.org/gateway/schoolsfirstfcu/products/auto-loans/auto-loans 800-462-8328
Capital One Online lender https://www.capitalone.com/cars/prequalify 800-689-1789
Carvana Online lender https://www.carvana.com/financing-prequalification 800-333-4554
Ally Online lender https://www.ally.com/learn/pre-approval/ 877-247-2559
myAutoloan Online lender https://www.myautoloan.com/content-articles/getting-a-car-loan-pre-approved.html N/A
Autopay Online lender https://www.autopay.com/ 844-276-3272

The lender will run a soft credit check to see your credit report. A soft credit check, as opposed to a hard inquiry, is when a lender requests a copy of your credit report or checks your credit score. In contrast, a hard inquiry occurs after you’ve applied for a loan and could affect your credit score.2

Note

A lender running a soft credit check won’t affect your credit score.

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.

FYI

Negative equity means that you haven’t paid off the loans on your car. If you trade in your car, you’ll still be responsible for those loans.

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.

Type of auto financing Direct Dealer
Who you pay Financial institution Dealership
When you pay for your vehicle When you get the loan, and then you pay the financial institution in monthly installments Monthly installments
Shop around for the best interest rates? Yes No
Convenient? No Yes
Types Bank, online lender, credit union Dealer-arranged, captive finance, “buy here, pay here”

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.
Maximum term length, APR minimum 36 37-60 61-72 73-84 85-96
New vehicle 1.79% 2.19% 2.29% 4.69% 5.59%
Late model, used vehicle 2.19% 2.29% 3.79% N/A N/A
Used vehicle 3.79% 3.79% 4.19% N/A N/A5

Or check out rates from the Sidney Federal Credit Union:

Type of loan and make years Approximate term (in months) APR
New and used cars, 2020-22 36 2.24%
New and used cars, 2020-22 48 2.49%
New and used cars, 2020-22 66 2.74%
New and used cars, 2020-22 78 2.99%
New and used cars, 2020-22 84 4.24%
Used autos, 2017-19 48 2.99%
Used autos, 2017-19 66 3.24%
Used autos, 2017-19 75 3.74%
Used autos, 2017-19 78 4.04%
2019 only 84 4.94%
2015-16 48 3.74%
2016 only 63 3.99%
2016 only 72 4.34%
2013-14 48 5.24%
2013-14 60 6.24%
Older autos, 2012 and older Up to 36 6.24%
2012 only 48 7.24%
2012 only 60 8.24%
Classic auto 36 6.49%
Classic auto 48 7.49%
Classic auto 60 8.49%
Classic auto 72 9.49%6
  • 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.
Type of financing Dealer-arranged Captive finance Buy here, pay here Banks Credit unions Online lenders
Good for those with good credit? Yes Yes No Yes Yes No
Good for those with subprime credit? Yes No Yes No Yes Yes

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.

What Are Car Loans, and How Do They Work?

What are car loans and how to they work
Car loans are loans that you can get in order to purchase a car. Here’s how they work:

  1. You’ll pay a down payment, a percentage of the total loan amount.
  2. You’ll pay off the loan amount in monthly portions over a set period.
  3. Over time, the lender will charge interest on the loan, which is how they make money. They’ll also charge you processing and issuing fees.
  4. If you don’t pay your loan, the lender could repossess your car.7

What Is Auto Loan Refinancing?

Auto loan refinancing is when you take out a new loan with different terms to pay for an existing loan.

  • Shorter loan term: Your refinanced loan could be paid off sooner than your original loan.

  • Lower interest rates: Refinancing your auto loan could mean lower interest rates, which translates into lower monthly payments. However, refinancing doesn’t always result in lower interest rates, as you’ll see below.

  • More interest over the vehicle’s lifetime: Although your interest rate could decrease, you’ll pay more interest over the vehicle’s lifetime than if you hadn’t refinanced.

  • Higher interest rates for older cars: If your vehicle is older than 5-10 years (depending on the lender), refinancing could actually make your interest rate increase.

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.

Can I Get an Auto Loan With Bad Credit?

Depending on the lender and the type of financing, you may or may not be able to get an auto loan with bad credit. There’s no universal minimum credit score that you need to obtain an auto loan, but clearly, the higher the score, the better the loan terms and interest rates.

If you have bad credit, we recommend getting auto loans from:

  • Credit unions
  • Online lenders
  • “Buy here, pay here” dealer financing

Improving Your Credit Score

To lower your interest rates, we recommend improving your credit score before applying for auto loans. You can take these steps to improve your credit:

  • Open new accounts. To build your credit file, you’ll need to open a few active accounts. These can include a credit card or a no-fee rewards card. However, once you’ve opened a few accounts, stop applying for new accounts, as hard inquiries can diminish your credit score.
  • Pay bills in a timely manner. It might be easier said than done, but make sure you make all of your loan and credit card payments within 29 days of their due dates. Past 30 days, the company will report the lateness to the three credit bureaus, which will lower your credit score. We recommend setting up automatic payments.
  • Pay off old balances. Again, easier said than done, but catch up on any old bills, as a late payment can stay on your credit report for up to seven years. If that’s not possible, talk to a credit counselor about a debt management plan.

Alternatives

If you can’t improve your credit score for whatever reason, you may still be able to get an auto loan. Here are two ways to keep your interest rates to a minimum:

  • Get a co-signer. If you know someone with good credit who will co-sign your car loan, that could lower the interest rate. Of course, you’ll have to pay your loan on time, or else your co-signer will have to repay the loan along with you.
  • Save up for a large down payment. Another option is to put down more money in the first place. This will decrease your interest rate if you can swing it.

Buying vs. Leasing

Maybe you don’t qualify for an auto loan because of your subprime credit, or maybe you don’t want to shell out the money for a down payment. An alternative to buying a car is leasing a car, meaning you pay to use it for a certain period of time or number of miles. With leasing, monthly payments will be lower than auto loan payments. However, you’ll have to return the car when the lease is up, unless the dealership lets you buy it.8

Auto Loan Statistics

Here are some quick numbers regarding auto loans and the debt can come with them:

  • As of the second quarter of 2021, about 55 percent of used cars are financed, while 45 percent of new cars are financed.
  • People with subprime credit took out 19 percent of all auto loans in 2021, nearly 1 in 5.
  • The state of Tennessee has the highest percentage of loans for used cars, at 72 percent.
  • Only 2 percent of auto loan accounts had 30-day delinquencies, meaning that over 98 percent of people paid their loans on time.
  • From April 2018 to April 2019, there was a 4 percent increase in auto loan originations and a 2 percent increase in inquiries. On the other hand, there was a 2 percent decrease in credit tightness, which occurs when banks turn down loans due to applicants’ poor credit scores.9

Recap

Getting a car loan is only the first step of the car-owning process. Next, you’ll need auto insurance. We recommend starting with our list of the best auto insurance to find the right provider and policy for you.

Citations

  1. Auto Finance Insights. Experian. (2021).
    https://www.experian.com/content/dam/noindex/na/us/automotive/finance-trends/state-of-auto-finance-q2-2021.pdf

  2. Will Checking Your Credit Hurt Credit Scores? Equifax. (2022).
    https://www.equifax.com/personal/education/credit/score/will-checking-your-credit-hurt-credit-scores/

  3. Car Financing & Loans. New York City Bar. (2022).
    https://www.nycbar.org/get-legal-help/article/consumer-law/automobiles/car-financing-loans/

  4. Credit Union and Bank Rates 2021 Q2. National Credit Union Administration. (2021).
    https://www.ncua.gov/analysis/cuso-economic-data/credit-union-bank-rates/credit-union-and-bank-rates-2021-q2

  5. Auto Loan Refinancing. Navy Federal. (2022).
    https://www.navyfederal.org/loans-cards/auto-loans/auto-refinance-rates.html

  6. Auto Loan Rates. SFCU. (2022).
    https://sfcuonline.org/borrow/loan-rates/auto-loan-rates

  7. How Does Financing a Car Work? Experian. (2020, June 2).
    https://www.experian.com/blogs/ask-experian/how-does-financing-a-car-work/

  8. Leasing a Car. FTC. (2022).
    https://www.consumer.ftc.gov/articles/financing-or-leasing-car#Leasing

  9. Auto loans. CFPB. (2022).
    https://www.consumerfinance.gov/data-research/consumer-credit-trends/auto-loans/