When buying a vehicle, it's important that you get the right type of financing with the best terms possible. While plenty of financing options exist for car buyers, there are benefits and drawbacks to each. Here's what to know about where to get a car loan before you start the car-buying process.
1. Research Types of Car Loans
There are several different types of auto loans available, and some are even specialized to help people with less-than-stellar credit. Here's a quick summary of how each option works and who should consider it.
Dealer Financing
There are three types of financing you can get through a dealership: dealer-arranged financing, captive financing and buy here, pay here (BHPH) arrangements. Here's what to know about each:
- Dealer-arranged financing: With this option, the dealer shops around for a loan on your behalf, obtaining quotes from multiple lenders. This process can be convenient and save you some time, but keep in mind that the interest rate you get this way may be slightly higher than what you'd be able to get on your own. That's because dealers may offer what's called a "buy rate," which includes their compensation for handling the process.
- Captive financing: If you're buying a new or certified pre-owned car, you may be able to obtain a loan from the manufacturer's own financing company. This option may provide special financing promotions, especially on new models. That said, there may be restrictions on which makes and models you can choose, and you may not get the chance to compare the offer with other lenders.
- BHPH financing: Buy here, pay here dealers specialize in working with people who have bad credit or no credit history and handle financing in-house rather than sending your contract to a lender. These loans offer easy approval, but dealers tend to charge exorbitant fees and interest, and often also ask for a high down payment.
If you're considering dealer financing, speak to your dealer to learn more about the process.
Direct Financing
If the dealer you're buying from doesn't offer financing options, you're buying from a private party or you simply want more options, you can also consider applying directly with auto lenders on your own.
Options include banks, credit unions and online lenders. You could even use an online auto loan marketplace, which allows you to compare offers from multiple online auto lenders in one place based on your FICO® Score☉ . This arrangement makes it easy to shop competitive interest rates and pick the option with the best terms.
If you're considering direct financing, prioritize lenders that offer prequalification. A prequalification tool can give you an idea of what you qualify for based on your credit history with just a soft credit check, which won't hurt your credit score.
Learn more >> Bank or Dealership: What's the Best Way to Finance a Car?
2. Check Your Credit
It's possible to get approved for an auto loan with poor credit or no credit history at all. However, bad-credit auto loans typically charge higher interest rates and fees, so it's still a good idea to review your credit and see if you can make improvements before you start applying.
Start by registering with Experian to get access to your FICO® Score and Experian credit report for free. If your score needs some work, review your report to identify where you can make improvements.
The steps you take to build your credit score will depend on your unique credit profile, but some options may include:
- Getting caught up on past-due payments
- Paying down high credit card balances
- Limiting unnecessary credit applications
- Making all payments on time
In some cases, you may need to simply wait for negative items to be removed from your credit report.
Learn more >> What Is a Good Credit Score for an Auto Loan?
3. Shop Around for the Best Rate
Shopping around is one of the smartest ways to secure the best possible terms on your auto loan. While prequalification can give you a basic idea of your eligibility, it can help to get preapproved with several lenders, even if you're planning to go through a dealership.
This rate-shopping process will make it easier to evaluate your choices and make sure you get the best possible deal. While preapproval will typically involve a hard inquiry, you can minimize the impact on your credit score by completing your rate shopping within a short period of time.
Learn more >> How to Get the Best Auto Loan Rates
4. Consider a Cosigner
If your credit needs some work, it can help to apply with a cosigner, such as a parent, sibling or spouse. Once you submit the application, the lender will consider the credit histories and incomes of both applicants to determine eligibility and loan terms.
Applying with a creditworthy cosigner can potentially help you qualify for better interest rates. Keep in mind, though, that your cosigner will be responsible for paying the debt if you can't. What's more, the loan will appear on their credit reports as well as yours until it's refinanced or paid in full.
Safeguard Your Credit for Future Financing Needs
Regardless of your current financial and credit status, building and maintaining a good credit history over time can help you obtain favorable financing when you need it. With Experian, you can monitor your credit for free, with ongoing access to your FICO® Score and Experian credit report.
You'll also get real-time alerts when changes are made to your credit score, making it easier to stay on top of new developments and address potential problems as they arise.