Financing a car shouldn’t be an overly complicated process for first-time buyers. The easiest way to learn how to finance a car is by understanding your credit score, by applying for loans from multiple lenders and by getting preapproved before beginning your search.
In this article, we at the Guides Auto Team will help you make sense of the auto financing process before we highlight some providers with the best auto loan rates.
There are a few proven strategies that will help you to secure a car loan with the best possible rate. These steps should begin even before you determine the car that you want to buy. We’d suggest that you approach your car purchase by following the process outlined below.
Step 1: Check Your Credit Score
Your credit score goes a long way toward setting how much you can borrow and at what interest rate. You need to know where your credit report stands before you apply for any car loan. The good news is that you’re entitled to a free copy of your credit report every 12 months from each of the major reporting bureaus. Head to AnnualCreditReport.com to get your free report.
Credit scores typically range from 300 to 850. To get the best annual percentage rate (APR) on your loan, you’ll probably need a credit score of 661 or higher. If you find that your score is 600 or below, you can learn how to improve your credit score before you apply for an auto loan.
If you have poor credit and need a car, you should consider used vehicles that cost less. Watch out for longer loans that come with lower monthly payments, as they could lead to negative equity. Getting a co-signer on your auto loan could also make it easier to get approved for the full purchase price of your potential vehicle.
APR vs. Interest Rate
APRs and interest rates have different meanings. An interest rate is the cost of borrowing money, while the APR gives you a better idea of the total cost of the loan by including fees and discounts.
APRs will be higher than interest rates because they include upfront fees in your overall car payment. Credit cards mention APRs more often than interest rates because it’s a more accurate representation of what you’ll likely end up paying.
Factors That Affect Your Credit Score
Before you finance a car, take the time to explore the factors that could change your credit score. To get insights on the subject, check out the chart below:
Applying For a Car Loan: Factors That Affect Auto Loan Rates
Interest rates vary widely depending on the lender and borrower. When you apply for an auto loan, lenders consider the following factors to determine what your APR will be:
- Federal interest rate: This sets the rate at which financial institutions borrow money. APRs typically change after federal rate increases.
- Debt-to-income ratio: This ratio, commonly known as DTI, is the percentage of your monthly debt payments compared to your monthly gross income. Financing a car if you have a DTI ratio of 43% can be a difficult process.
- Loan terms: A longer-term loan usually has higher interest rates, although it also brings lower individual loan payments. An 84-month auto loan is rarely recommended by personal finance professionals unless a driver has no other choice. That’s because monthly payments, which include interest, add up over the life of the loan.
- Vehicle type: You’ll typically have higher interest rates on loans for used cars and high-mileage vehicles. The cost of the car also has a major impact on auto loan rates.
- Industry competition: Market conditions play a role in determining auto loan interest rates. Lenders regularly monitor competitors’ rates as they set their own.
Average Loan Rates by Credit Score
To give you an idea of the bigger auto loan picture, here’s a graph with the average car loan interest rates by credit score from Experian. You’ll notice that car buyers with good credit histories get significantly lower interest rates on average.
How To Apply For a Car Loan: Conclusion
You can streamline the auto financing process by knowing your credit score, by comparing quotes from various lenders and by getting preapproved for an auto loan. Knowing how to finance a car and understanding how much you can borrow will help you become a stronger negotiator and could move you closer to your dream vehicle.
Our Recommendations for Auto Loans
When you’re ready to compare offers and get a preapproved auto loan, we suggest that you begin with the top-rated lenders outlined below. Drivers are usually satisfied with the rates and service provided by myAutoloan and Consumers Credit Union.
Filters
Location
Loan Term (Months)
12-84
Min. Credit Score
300-680
| Lending Partner | Loan Type | Loan Term (Months) | Min. APR (%) | Min. Credit Score | See More |
|---|---|---|---|---|---|
| Refinance Loan | 48 – 84 | 5.29 | 550 | Compare Rates | |
| Refinance Loan | 12 – 72 | 5.49 | 575 | Compare Rates | |
| New or Used Car Loan | 12 – 84 | 7.24 | 575 | Compare Rates | |
| Refinance Loan | 12 – 84 | 6.24 | 620 | Compare Rates | |
| Refinance Loan | 36 – 84 | 4.99 | 640 | Compare Rates | |
| New Car Loan | 12 – 84 | 0.00 | 300 | Compare Rates | |
| Refinance Loan | 36 – 72 | 5.99 | 680 | Compare Rates |
| Lending Partner | Loan Type | Loan Term (Months) | Min. APR (%) | Min. Credit Score | See More |
|---|---|---|---|---|---|
| Refinance Loan | 48 – 84 | 5.29 | 550 | Compare Rates | |
| Refinance Loan | 12 – 72 | 5.49 | 575 | Compare Rates | |
| New or Used Car Loan | 12 – 84 | 7.24 | 575 | Compare Rates | |
| Refinance Loan | 12 – 84 | 6.24 | 620 | Compare Rates | |
| Refinance Loan | 36 – 84 | 4.99 | 640 | Compare Rates | |
| New Car Loan | 12 – 84 | 0.00 | 300 | Compare Rates | |
| Refinance Loan | 36 – 72 | 5.99 | 680 | Compare Rates |
No results were found.
myAutoloan: Best Low-Rate Option
Loan amounts: $8,000 minimum for purchase loans
Loan terms: 12 to 84 months
Availability: 48 contiguous states
Minimum credit score: 575
We designate myAutoloan as the Best Low-Rate Option because it offers great rates for borrowers with excellent credit and competitive rates for a range of credit scores. The company works with a wide network of lenders, including credit unions, banks and car dealerships. One loan application with myAutoloan will yield four offers that you can compare. The auto finance company has an A+ rating with accreditation from the Better Business Bureau (BBB).
Consumers Credit Union: Most Flexible Terms
Loan amounts: No minimum or maximum
Loan terms: Up to 84 months
Availability: All 50 states
Minimum credit score: 640
Even if you’ve checked with your local credit union, it’s worth figuring out how to finance a car through Consumers Credit Union. You can join this credit union no matter where you live, and it offers low rates and financing terms of up to 84 months. Consumers Credit Union also features a car-buying service in conjunction with TrueCar, complete with member discounts. The company boasts an A+ rating from the BBB and has been accredited since 2012.
How To Get a Car Loan: FAQ
Below you’ll find frequently asked questions about how to finance a car:
The best way to finance a car is to check your credit report, compare quotes from multiple lenders, get preapproved for an auto loan and then negotiate the best price on the vehicle.
Yes, you’ll generally receive lower interest rates when financing cars through a bank or a credit union rather than through a dealer.
It can be easier to get dealership financing than to secure a loan through a bank, particularly if you have bad credit. Dealerships typically have connections with a wide range of lenders and can easily secure financing as a result.
Our Methodology
Because consumers rely on us to provide objective and accurate information, we created a comprehensive rating system to formulate our rankings of the best auto loan companies. We collected data on dozens of loan providers to grade the companies on a wide range of ranking factors. The end result was an overall rating for each provider, with the companies that scored the most points topping the list.
Here are the factors our ratings take into account:
- Reputation (30% of total score): Our research team considered ratings from industry experts and each lender’s years in business when giving this score.
- Availability (20% of total score): Companies that cover a variety of circ*mstances are more likely to meet borrowers’ needs.
- Loan Details (15% of total score): We considered the types of loans, term lengths and loan amounts that are available from each lender to determine this score.
- Rates (25% of total score): Auto loan providers with low APRs scored highest in this category. Available discounts were also taken into account.
- Customer Experience (10% of total score): This score is based on customer satisfaction ratings and transparency. We also considered the responsiveness and helpfulness of each lender’s customer service team.
*Data accurate at time of publication.
