Where Can You Get the Best Car Loans?

Decades ago, things were simpler. To buy a car, you went to a local dealership, chose a car, and if you needed financing, you got it right there in the showroom. Most consumers didn’t even consider going to a bank or credit union, and, of course, there was no internet, so there was no opportunity to shop for financing online.

But how things have changed. While getting financing arranged by the dealership is still the preferred method for the majority of consumers, more and more buyers are accessing other sources of financing. And they are discovering those sources can save them serious amounts of money. A recent study by FICO indicated that the percentage of car buyers who used dealer financing tumbled from 73 percent to 63 percent between 2018 and 2019. Consumers say they will increasingly use other sources of financing instead of relying on the dealer. Here are the places where you can get the best car loans.

If you like doing things in your underwear, online lenders are the perfect choice. They enable you to do research and get pre-approved for a loan while you’re at home at night in your BVDs or your PJs. Online lenders are very easy to access 24/7/365, and many sites allow you to see comparative offers.

Just as with most businesses, the customer service of online lenders varies widely, so it is worthwhile to check out consumer reviews and seek the opinion of the Better Business Bureau. Some online lenders specialize in financing for car-buyers with average or above-average credit, while others specialize in so-called sub-prime credit — those with a spotty credit history. It is wise to limit your search to those lenders who are most likely to offer credit to customers like you.

Banks are very well-known lending institutions to most of us. The vast majority of consumers have one or more bank accounts, and they understand that banks pay interest on savings based on investing depositors’ funds in things like car loans. Seeking a loan from the bank where you have an account is a logical place to start.

Some banks are giant and operate nationally, while others serve only their local market. The age and types of vehicles individual banks will finance vary widely as well. Some banks will only offer loans on vehicles purchased through dealers with whom they have a relationship, while others will lend strictly based on the creditworthiness of the customer and the specifics of the car being purchased. By researching several banks, you can get pre-approved for several car loans, compare rates, and identify the best offer for you.

Getting a car loan from a credit union is in many ways similar to getting one from a bank, but credit unions are structured very differently from banks. A credit union is an organization owned by its member-depositors, and it returns its profits to its members through interest on savings. Typically, credit unions offer their members favorable terms for consumer loans like car loans.

To obtain a loan from a credit union, most often you must join the credit union, but that is not especially difficult and involves very little expense. Some credit unions require their members to be associated with a special group, like the military, government employees, or employees of a particular business, but others have much less stringent requirements. To get the best car loan rates, it might be necessary to allow the credit union to take direct withdrawals from your credit union account.

Virtually every car dealer in the United States has relationships with banks and other lending institutions. The auto industry is a credit-driven business, so these relationships are integral to their success.

In the most typical scenario, a consumer about to buy a car obtains the auto loan via the dealer through these established relationships. This is very convenient for the buyer, but it might not be the lowest-cost way to obtain a car loan. Frequently, the interest charged on the loan will be higher than the lowest interest rate you might find if you did an independent search for a loan. Often, the dealer gets a fee for bringing the business to the lender — a fee that wouldn’t be charged if you were to obtain the loan yourself. Certainly, convenience has value, and getting your loan through the dealer is convenient. You simply need to determine how much that is worth to you.

Just as the vast majority of car dealers have relationships with lenders, so do the vast majority of auto manufacturers have close affiliations with lending institutions. Sometimes these lenders are even owned by the car manufacturer. In the car business, these lenders are called “captive finance companies,” and many dealers use their services to finance many of their customers’ car purchases. They might also use them to finance their inventories.

Typically, car loans funded by captive finance companies are available nationwide at competitive rates. Beyond that, captive finance companies very often provide the financing for special incentive offers that are subsidized by the manufacturer. These include low- and zero-interest-rate loans and special lease offers. The best of these promotional offers are often available only to those who have top-tier credit, but other money-saving offers are available even for those who lack the highest credit scores.

As we mentioned, virtually all car dealers have relationships with lending institutions. Originating car loans is a profitable part of their business. But with specialized car dealers often referred to as Buy Here, Pay Here dealers, the origination of car loans is as much a part of their business as selling cars.

These dealers — which typically cater to consumers with below-average credit — finance and fund the car loans themselves. They are not only the dealer but also the lending institution. Rather than depending upon the requirements of the lending institution to determine if a particular customer qualifies for a loan, they make that determination themselves. Instead of making payments to a lender like a bank, credit union, or captive finance company, the consumer makes the payment directly to the dealer.

For those with poor credit or no credit, a Buy Here, Pay Here dealership can provide the opportunity to buy a car when they otherwise would find that impossible. But they should understand that this is very often the most expensive way to obtain a car loan.

Interest rates from a Buy Here, Pay Here dealers are frequently among the highest on any auto loan, and often the dealer will also charge additional fees. Should you buy a car from this type of dealer, it is especially critical that you make every payment on time and in full. The failure to do so could result in the repossession of the vehicle, and all the payments you have made to that point in time will net you nothing beyond the use of the vehicle you had when it was in your hands.

There is no doubt that the size of the monthly payment is of paramount importance to most car buyers. Whether we have a formal budget or not, our car payment must fit into our monthly tally of income and expenses. And after housing, transportation is one of the typical family’s biggest expense categories.

If you are minding your money, though, other auto loan factors are important as well. Among them are the interest rate and the length of the loan. Beyond that, there is the down payment required to purchase the vehicle, and that is particularly important because it requires you to outlay a significant amount of cash, often 10 percent to 20 percent of the vehicle purchase price. You need to look at all these factors when determining if you are getting a good deal.

When it comes to getting a car loan, there is no substitute for shopping around. Your credit history is unique and interest rates are ever-changing, so doing your own research very close to the time you plan to purchase is critical to understanding your options and choosing the best one.

You have several choices — online lenders, banks, and credit unions — plus the options dealers can offer you. They can arrange your financing with an outside lender or a captive finance company, and some dealerships will finance the loan themselves. There is no one-size-fits-all answer on which choice is the best for you. That depends solely on your particular circumstances.