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Buying a car is a big financial decision, whether you're purchasing a new vehicle or a used car.
Auto loans are available from car dealerships, banks and credit unions—and credit unions might offer better interest rates than other options. That could translate to big savings over the life of your loan.
If you're in the market for an auto loan, your local credit union may be a good place to start. Shopping around could help you find a competitive rate and flexible eligibility requirements.
Auto Loan Borrowing Options
You have several options if you're looking for an auto loan. Financing is available from the three main sources listed below. Each one has its own benefits and drawbacks, but credit unions are known to offer lower interest rates on car loans in many cases.
Credit Union
Credit unions are member-owned cooperative financial institutions that work a lot like banks. But unlike banks, they aren't designed to make money for their stockholders. Instead, their products and services are meant to benefit their members. If a credit union does generate a profit, they'll direct those proceeds back to their members by way of lower interest rates on loans and credit, as well as higher yields on savings accounts and certificates of deposit (CDs).
Membership requirements vary by credit union. Some serve specific types of employees, such as teachers or firefighters; others are geared toward veterans and U.S. service members. Meanwhile, community-based credit unions serve people who live or worship in the area.
Bank
Banks also offer financial products and services, including auto loans, but they operate for profit. As such, interest rates on loans and credit tend to be higher than credit unions. But banks are open to any interested customer, so you don't have to become a member to get a car loan. That might be a good financing option if you already do your banking there and want all your accounts in one place. They might even offer a relationship discount.
Banks tend to offer a wider range of services and financial products than credit unions. It can also be appealing if you have access to local brick-and-mortar locations and customer service representatives.
Dealer Financing
Many car dealerships offer in-house financing, which can be a convenient option. That can include:
- Dealer-arranged financing: The dealer will compare auto loan options and connect you to a lender to fund your loan. However, you'll likely get a lower rate by working directly with lenders on your own. That's because dealerships might charge a "buy rate" as compensation. If you do go with dealer-arranged financing, showing up with a preapproval letter from a credit union could help you negotiate a lower rate.
- Captive financing: Some dealers offer loans directly from the car manufacturer's financing company. That could unlock special promotional deals—like 0% annual percentage rate (APR) for borrowers with outstanding credit. But you may be limited to certain makes and models.
- Buy here, pay here (BHPH) financing: This option is available from specialty dealerships that work with people who have poor credit or a thin credit file. Approval is typically easy, but you can expect a high interest rate and fees.
Credit Union vs. Bank vs. Dealer Financing
Each financing option has pros and cons to consider. Here's how they measure up in terms of interest rates, qualifying criteria and customer service.
| Credit Union | Bank | Dealer Financing | |
|---|---|---|---|
| Average interest rate (48-month loan) | Used: 6.34%* New: 6.15%* | Used: 7.80%* New: 7.42%* | Varies depending on the car and dealership, as well as the borrower's credit and down payment amount. Promotional rates can be as low as 0% for borrowers with excellent credit, but they're typically higher than credit unions and banks. |
| Qualifying requirements | Generally looser eligibility requirements compared to other lenders. | Will consider your credit, down payment amount, income and loan amount. Some may have stricter eligibility criteria than others. | May be more willing to work with borrowers who have poor credit or lack credit history. However, that might translate to higher interest rates and fees. |
| Customer service | May have nearby branches you could visit in person if there's an issue with your car loan. | You may be able to visit a brick-and-mortar location for help, or you may only have the option of calling a customer service line. | Could be in person or via phone, depending on the dealership. |
*Source: Average rates based on third quarter 2024 data from the National Credit Union Association (NCUA)
Benefits of Getting a Car Loan at a Credit Union
Getting a car loan through a credit union has its advantages. These include:
- Lower interest rates: Borrowers with strong credit and solid income will likely be eligible for the best rates and terms.
- Flexible requirements: Even if your credit needs some work, a credit union might be willing to consider your bigger financial picture. Some might even offer programs to help you build your credit.
- Access to smaller car loans: Auto lenders generally don't offer micro-loans, which can be a problem if you're making a large down payment or buying an inexpensive car to begin with. Some credit unions have low loan minimums, or none at all.
- More personalized service: Credit unions prioritize putting their members first. That could set the stage for a more personalized experience—your lender isn't a big bank or faceless corporation. Some credit unions might also be willing to waive the occasional late fee if you have a positive payment history.
Learn more >> Pros and Cons of Banking With a Credit Union
How to Get a Car Loan From a Credit Union
If you decide that a credit union is the best auto lender for you, it's time to prepare for the loan application process. That involves the following steps:
- Check your credit. The stronger your credit score, the more likely you are to qualify for a competitive interest rate. According to Experian's State of the Automotive Finance Market report from the second quarter of 2024, the average used car APR for someone with subprime credit is over 18%. That number is about 7% for someone with excellent credit.
- Set your budget. Determine your down payment amount and desired monthly payment. From there, you can compare makes and models that are within your price range. Sites like Kelley Blue Book and Edmunds can help you compare price points. Car costs include your loan payment, gas, insurance premiums, maintenance and repairs.
- Choose a credit union. There are lots of credit unions out there. Do your research to find one that's aligned with your goals and values. You can start your search with the NCUA's credit union locator. Many charge a membership fee to join that ranges from $5 to $25.
- Get preapproved. Once you've joined a credit union, find out how to get preapproved for an auto loan. This usually involves a hard credit inquiry, and you may have to submit documentation to verify your income. You should receive estimated loan offers once you're preapproved.
- Compare cars and dealerships. You can take your preapproval letter with you when shopping around for cars. That can help you look for vehicles that are within your budget. When you've made a decision, the next step is contacting the credit union to finalize your loan.
- Button up your loan. If you're approved, you'll need to review and sign your loan agreement. You might also have to provide proof of insurance. From there, the credit union will either give you a check made out to the dealer, or pay the dealer directly.
Learn more >> How to Join a Credit Union
The Bottom Line
Credit unions can make great auto loan lenders. You can expect lower interest rates and easier eligibility requirements, among other perks. But you'll want to shop around and compare credit unions before choosing one. No matter what lender you choose, your credit score is an important factor when applying for a car loan. You can get your credit report and FICO® Score☉ for free from Experian to see where you stand.