An auto loan is a great way to purchase a car right away and repay its cost gradually over several years. It eliminates the need to save money for a long time so you can drive your dream car when you want it. Still, each car loan has its interest rate, which is the amount lenders charge for giving you money. This parameter will affect the total amount you will have to repay over the loan life. Therefore, it's important to find a loan with the lowest possible APR to save money on interest. We're here to help you better navigate this loan product.
The table below shows the best auto loan deals and their key features to help you find an option that suits your current needs. The terms provided may be changed by each lender and are for informational purposes only. Before you make a final decision, contact the lender for more details.
|
Lender |
APR |
Repayment Terms |
Loan Amounts |
Best for |
|
LightStream |
7.24%-15.19% (for options with AutoPay) |
24-84 months |
$5,000-$100,000 |
Overall best auto loan option |
|
Bank of America |
from 5.99% |
48-72 months |
from $7,500 |
Good credit |
|
Capital One |
Not specified |
24-84 months |
from $4,000 |
Convenience |
|
Upstart |
7.11%-29.99% |
24-84 months |
$9,000-$60,000 |
Borrowers with fair credit |
|
myAutoLoan |
from 6.99% |
24-84 months |
from $8,000 |
Ability to choose the best deal from multiple lenders |
|
Carvana |
7.95%-27.95% |
12-72 months |
Not specified |
Online loan process |
Each auto loan lender may have its own terms. Here's what to pay close attention to when choosing the best loan option.
The interest rate determines how much you'll pay on top of the borrowed amount. Generally, a good credit score allows you to access a lower interest rate. Shop around and compare APRs offered by various banks, credit unions, online lenders, and dealerships. You can also pre-qualify from several lenders to get approximate loan terms and have a better understanding of what you can get.
Besides an interest rate, look at additional fees associated with the loan. The most common extra costs include origination fees, application fees, late fees, and prepayment penalties. While some of them will only affect your loan under certain conditions, others may increase your loan cost right away or reduce the amount you will get on hand.
The loan term is another factor that directly affects your total loan cost and determines your monthly payment amount. Auto loan terms typically range from 24 to 84 months. Although it may be tempting to choose a maximum loan length due to smaller monthly payments and lower income requirements, the total borrowing cost will be significantly higher. A shorter term translates to higher monthly payments but less overall interest paid. Therefore, you need to choose wisely.
A larger down payment reduces the amount you need to borrow, which also lowers your monthly payment and the total interest paid. On top of that, it demonstrates your financial responsibility. As lenders will consider you less risky, they may offer you a more favorable interest rate. Aim for at least a 20% down payment if possible.
Each lender has its specific eligibility requirements, so you need to make sure you meet them before applying. Options with low APR may be attractive but always require a high credit score. Additionally, lenders will look at your income level, payment history, and employment status. You can also pre-qualify for loans with several lenders to get an idea of the rates and terms you might be eligible for without impacting your credit score.
An auto loan is a type of secured loan that helps you buy a new or used car or any other type of recreational vehicle. This borrowing option may sometimes require a borrower to make a down payment, which can be about 10% of the car's price. Another distinctive feature is that the car itself serves as collateral, protecting the lender from possible loan defaults.
Auto loans allow you to get the sum you need to finance the cost of a particular car. Most lenders won't give you money on hand. Instead, they will make a deposit directly to a seller or dealership. Then, you need to repay the loan amount plus interest in fixed monthly installments over a predetermined period.
The car you purchase serves as collateral for the loan. This means the lender holds the vehicle's title until you repay what you owe in full. If you fail to make payments, the lender has the right to repossess the vehicle.
Auto loans are quite common and are offered by multiple financial institutions. Here are the most common options.
Many large banks offer auto loans with competitive rates and terms. They tend to be reliable lenders with a history of stability, great service, and favorable loan terms. At the same time, there are several downsides. Most banks set quite strict eligibility requirements and long processing and funding times.
Credit unions offer loans to their members, typically with lower interest rates and fees due to their non-profit structure. These institutions often provide a more personalized loan experience but require membership to access their products and services. Membership can be restricted based on geographic location, employer affiliation, or other factors.
Online loan providers offer a streamlined application process, more lenient eligibility criteria, and potentially faster loan approvals. You might find their rates attractive, particularly if you have good credit. Still, borrowers with less-than-perfect credit are most likely to get higher interest rates compared to banks or credit unions.
Financing via the dealership can be arranged in place, making it a very convenient and simple way to buy a car. You might also negotiate the interest rate or loan terms directly with the seller, which may result in potential savings. However, dealerships often work with captive lenders. As a result, the rates offered might not be the most competitive.
There are various car loan options to consider depending on your specific needs and financial situation. Here's a closer look at some common types:
New car loans are designed to finance a brand new vehicle from a dealership. They typically offer longer loan terms, lower interest rates, and more favorable loan-to-value ratios compared to used car loans.
Used car loans are about financing a pre-owned vehicle. Their interest rates are generally higher than those on new car loans due to the higher risk associated with older vehicles. The repayment terms for used cars might also be shorter.
Auto refinancing involves replacing your current auto loan with a new one, often at a lower interest rate or with more favorable terms. This can be a smart strategy if your credit score has improved significantly since you took out the original loan.
A cash-out auto refinance allows you to borrow additional money on top of your existing auto loan's remaining balance. You receive the difference in cash, but this increases your total debt and may result in a higher monthly payment. If you choose a longer repayment period to reduce the amount you pay monthly, your total loan cost will increase.
Leasing a car allows you to drive a new vehicle for a predetermined period (typically 2-4 years) in exchange for monthly payments. At the lease end, you can return the car, purchase it for a certain price, or lease a new car. Leasing can be a good option if you prefer to drive a new car every few years and are comfortable with not owning the vehicle.
Like with any borrowing option, an auto loan has its strong and weak points. Here's a closer look at them.
Pros:
Affordability. A car loan allows you to purchase a vehicle even if you don't have the full amount upfront;
Credit-building opportunities. Making on-time loan payments can have a positive impact on your credit score;
Access to better cars. You can finance a more reliable or luxurious car compared to options available when you solely use savings;
Ownership. Once you repay the loan in full, you become a car owner with the freedom to sell or trade it in.
Cons:
Long-term debt. Auto loans add to your overall debt burden, which may be difficult for your budget. It's also a long-term financial commitment;
Credit score risks. Missing payments can damage your credit score;
Interest rates. The car will cost you much more than its real price due to interest charges;
Depreciation. The car's value decreases over time, potentially leaving you with more debt than the car's estimated price.
Risk of losing the car. If you default on your loan, the lender will repossess it to cover the outstanding loan balance.
While each lender has their own criteria when calculating an interest rate, there are several basic factors that significantly influence the APR you'll receive:
Credit score. Borrowers with a higher credit score (670 and more) are considered more reliable and can qualify for a lower APR;
Loan term. Shorter loan terms generally come with lower rates because you're repaying the loan faster and possess less risk to a lender;
Loan-to-value ratio (LTV). This ratio compares the amount you borrow to the value of the car. A lower LTV (larger down payment) indicates a smaller loan amount relative to the car's value. This makes you a less risky borrower and results in a lower APR;
Down payment. Besides an impact on LTV, a larger down payment also strengthens your application and shows your financial stability;
Car age. Newer cars with higher resale values might qualify for lower APRs compared to older ones.
Car loan interest rates typically start at 5.99% and can be up to 29.99% for borrowers with less-than-perfect scores. Before you decide on the lender, make sure you understand their requirements and learn your loan terms carefully. Also, choose the right loan type and lender for a better borrowing experience.
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