Want to be in the driver’s seat when it comes to buying a new or used car? Your best move is to shop for the right car loan, with the best interest rate, before you head to the dealer. That simple move helps:
- Put you in a stronger position at the dealership.
- Remove the uncertainty of the loan application process.
- Simplify the negotiation process.
Tip: Comparing interest rates from multiple lenders can help ensure you get the best car loan.
2017 car loan providers
|Lender||Minimum FICO||APR *||Loan amount / maximum term||Key facts|
Read NerdWallet's review
|475||1.99% - 24.9% (average: 14.8%)||$8,000 - $99,000 / |
|660||2.19% - 7.84%||$5,000 - $100,000 / |
|550||6.7% - 12.3% (average: 10.4%)||$10,000 - $50,000 / |
Read NerdWallet's review
|500||5% and up; max varies by state (average: 11%)||$7,500 - $45,000 /|
|300||NA||No restriction / |
How to apply online for an auto loan
When you apply, the lender will check your credit and contact you with a decision, which could take less than a minute in some cases. Some lenders will do a “soft pull” of your credit, which won’t damage your credit scores, to pre-qualify you. Later, at the dealership, you’ll fill out a full credit report for final approval. Other lenders will run a full credit check to get you preapproved. In both cases, the lender will offer you a loan at a certain interest rate. Some lenders will present a range of interest rates depending on whether the loan is for a new car, a newer used car or an older used car.
The lender will then give you a no-obligation check or email you a certificate to take to the dealership. Some lenders have restrictions on where you can buy a car using their loan. For example, some lenders work with a network of dealerships. Others won’t grant loans to buy cars from private sellers.
Negotiate the best deal for the car, being sure to leave enough money to cover taxes and fees. For example, if the loan is for up to $20,000, look for a car in the $15,000 range because the final price will be about $16,500 or higher.
Once you pay for the car with the lender’s check, the loan is finalized at the purchase amount. When using a lender’s certificate, you may have to fill out a credit application at the dealership, which will slightly reduce your credit scores.
Preapproval and pre-qualification help streamline the negotiation process because you can sidestep the car seller’s favorite tactic: the monthly payment game. If you negotiate a monthly payment instead of the price of the car, it’s easy to lose sight of the real price. But when you’re preapproved, you become a “cash buyer.” That means you can ignore the monthly payment question and concentrate on negotiating only the price when shopping for a new car.
Before you get started, you may want to run the numbers on an auto loan calculator to determine how much car you can afford.
Other points to keep in mind
- Apply to several lenders to find your best interest rate. Lenders who do only “soft pulls” of your credit don’t damage your borrowing ability. But it’s better to make all your loan applications within a two-week period. That will to minimize the damage to your credit score that multiple credit checks over an extended period can cause.
- Check the loan terms that your bank or credit union offers. Their rates often are competitive with online lenders.
- Gather the documents you might need before you apply for a loan: driver’s license, bank account numbers and pay stubs.
- Set up your loan so you pay it off as quickly as you can. Shorter terms usually mean lower interest rates.
Once you have online approval in hand, be careful when negotiating at a dealership. The finance manager may try to “flip” you by getting you to use the carmaker’s financing. It doesn’t hurt to hear the pitch, but make sure all the terms — particularly the length of the payback period — are the same as on your preapproved loan so that you can compare them accurately.
When shopping for a car loan, it’s important to be realistic. Just because interest rates are low doesn’t mean you should buy a higher-priced car. And remember, keeping up with the payments and getting the loan paid off on time are the most important things for you, your budget and your credit score.
Also: Consider refinancing your car loan to lower your monthly payment if you have a loan on an existing car.
Philip Reed is a staff writer at NerdWallet, a personal finance website. Email: email@example.com.
Updated Nov. 4, 2016.
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