Auto Loans helps you find the best auto loans.'s Guide to Finding the Best Car Loan

Buying a new car can be an exciting experience, but paying cash is simply not an option for most buyers.

This means you’ll likely need an auto loan. There are two financing options for buying a vehicle: direct lending and dealership financing. Below, we will examine both options.

Direct Lending: Get a Car Loan From a Bank or Apply Online

With direct lending, you get a loan directly from a finance company, bank or credit union. You agree to pay the amount financed for the vehicle purchase along with interest and any other finance charges over a period of time. You’ll generally receive a financing check or a wire transfer to your bank to pay for the vehicle and any other items you may have purchased, like a service contract, options or extended warranty.
One of the benefits of direct lending is that you can shop around and compare several lenders to ensure you get the best terms before you purchase a vehicle. You are also able to review credit terms before choosing a loan and buying a vehicle, so you’ll know the interest rate up front. Finally, because you received the funds directly from the bank, you basically become a cash buyer at the dealership, giving you the upper hand in the negotiation process.
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Online Car Loans Are a Simpler and Faster Way to Get an Auto Loan

Today, finding a car loan online is easy. We recommend you check out our car-loan comparison above. Comparing a variety of online car loans ensures you get the best possible deal, as the costs of these loans may vary by thousands of dollars.

Compare online car loans with our loan comparison tool before applying for an auto loan online.

Dealership Financing

Dealership financing is typically the path most buyers take because it’s generally the easiest. You go to the dealership, choose the vehicle you like, negotiate a price, then the dealership handles all the financing for you.

While it may seem like the dealership is providing the financing, it’s not. The dealership simply shops your credit around to various banks who then offer loans to pay for the vehicle. The dealer then chooses the loan that they feel is best — and by this, we mean the best loan for the dealership — and present it for you to review. And when you enter the contract, you’re entering it with the bank, not the dealership.

While this may seem great because it’s so simple, there are a few downsides to dealership financing:

  • The dealer may present only loans that offer kickbacks
  • You’re separated from the rate-negotiation process
  • There may be better options that you never hear about
  • Dealers can creatively package loans to make a bad deal seem good

The Many Options of Dealership Financing

Multiple financing options may also be available at the dealership. For instance, it’s not uncommon for dealers to have established relationships with various finance companies and banks, which means you may be able to benefit from a variety of financing options. But you may have to do some negotiating to see all your available options.

Special programs may also be available. For instance, if you’re working with a new-car dealership, the manufacturer may sponsor low-rate loans or incentive programs to encourage buyers to make purchases.

Keep in mind that these programs may be limited to specific vehicles or may come with special requirements. For example, you may be required to agree to a shorter contract length or a larger down payment, so it’s important to make sure you always understand the terms of the offer. You may also need a higher credit rating to qualify for these programs.

Consumers should always make a point of shopping around before making a final decision regarding which type of financing is best for their particular needs.

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Applying for Car Loan Financing

When applying for financing, it’s also important to understand the type of information you will need to provide. If you opt for dealership financing, you will usually submit your application through the finance-and-insurance office at the dealership. This will involve completing an application, which will require such information as:
  • Name
  • Social Security number
  • Date of birth
  • Address
  • Employer
  • Length of employment
  • Occupation
  • Income sources
  • Gross monthly income
  • Debt

The dealership will also obtain a copy of your credit report, which contains information about your past and current credit obligations, including payment history, balances, credit limits and interest, any relevant data from public records, and your payment history. Each account’s status will also be included on your credit report, including any overdue amounts and if the account is open or closed. If a creditor has taken any legal steps to collect on a debt, this information will also be included.

Most dealerships will submit your application to multiple possible lenders, including finance companies, banks and credit unions, to find an assignee who’s willing to finance your purchase. Your credit application will be evaluated using various techniques to determine whether you will be approved for a loan.

When you finance through a dealer, you will not deal directly with prospective lenders. The decision to offer you financing will be based on an evaluation of your credit score, credit report, your completed application and terms of the sale, including your down payment amount. If a lender agrees to finance your purchase, it will notify the dealership and give a buy rate, which is the interest rate the lender is willing to offer. The dealer then comes to you with an interest rate, which may or may not be higher than the buy rate. This is where you want to start negotiating that interest rate to push the rate you are paying closer to the buy rate the dealership received.

Always Compare Car-Loan Interest Rates

Consumers should be aware that the interest rate the dealership offers may not be lower than the rate they could get with direct lending. In many cases, consumers can negotiate the terms of payment and the APR with a dealership. As we mentioned before, the APR that consumers get from dealership financing is typically higher than the buy rate. This is because the rate includes the amount the dealer is compensated for handling the consumer’s financing.

If the dealer promotes a discount, rebate or special price, consumers should make sure they know exactly what is available and what the eligibility requirements are for those offers. This is quite important, as such offers can reduce the vehicle’s purchase price, thus the amount the consumer must finance. Before signing a contract, consumers should always ask questions about all terms, including whether those terms are final or subject to change.

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