Most cars are bought with a loan, and the type of loan you choose can change the total cost by thousands of dollars. The main differences are who lends you the money, what secures the loan, and how long you take to repay it.
Direct lending: banks, credit unions and online lenders
You apply directly to a lender, get approved for an amount and a rate, then shop for the car. Credit unions often offer some of the lowest rates, especially for members with good credit. The big advantage is negotiating power: you walk into the dealership knowing your rate, and you can focus on the price of the car.
Dealer financing
The dealer arranges the loan through a partner lender or the manufacturer’s finance company. It is convenient, and sometimes very cheap: carmakers regularly offer promotional rates, even 0 percent, on certain models to qualified buyers. But dealers may also add a markup to the interest rate they receive from the lender. Compare their offer with your pre-approval and choose the lower total cost.
Sometimes a manufacturer offers either a low rate or a cash rebate, not both. Do the math: with a cheap outside loan, the rebate can be worth more.
Secured and unsecured loans
Nearly all car loans are secured by the car itself, which keeps rates lower; the lender can repossess the car if you stop paying. Unsecured personal loans can be used to buy a car too, but usually at higher rates. They are mostly worth considering for older, cheap cars that some lenders will not finance.
Loan length
Loan terms of 72 or even 84 months are now common, and they lower the monthly payment. The catch is more interest overall and a longer period in which you owe more than the car is worth (“negative equity”), which becomes a problem if the car is written off or you want to sell. A term of 48 to 60 months is a safer balance for most buyers.
Buy-here-pay-here and subprime loans
Some dealers lend directly to buyers with poor credit. Rates can be very high, and contracts sometimes include tracking devices or strict payment schedules. If your credit is weak, try a credit union first, consider a larger down payment or a cheaper car, and read every line.
Getting the best rate
Check your credit report before you apply, get quotes from two or three lenders within a short period (multiple car-loan inquiries in a short window usually count as one for credit scoring), and compare the APR and the total amount repaid. The Consumer Financial Protection Bureau’s auto loan tools are a good reference. For the bigger picture, see setting a realistic car budget and the benefits of leasing.
