Buying a car is a huge deal. Besides purchasing a home, a vehicle is likely the most expensive object you’ll own. The average new automobile costs a whopping $34,648, reported Kelley Blue Book. But whether you’re buying a new or used car, expect to pay thousands.
If you’re like most people, you don’t have $30,000 sitting in a bank account waiting to be spent. In fact, an Experian study shows the majority of buyers rely on loans to buy a car rather than paying cash. But figuring out how to finance a car can be tricky for new shoppers.
How to finance a car
Financing a vehicle means you’ll borrow the money you need to purchase the car. You’ll have to repay it over a set period, plus you’ll pay interest to the lender.
Your loan’s interest rate can vary depending on your credit score and income. If you have poor credit, you’ll pay more in interest than a borrower with excellent credit.
However, it’s possible to get a loan with less-than-ideal credit. If you’re trying to figure out how to finance a car, here are five approaches to consider.
1. Dealer-sponsored loans
Car dealerships try to make the buying process as quick and easy as possible to maximize their chances of making a deal. That’s why most dealers offer to finance within the dealership itself.
Dealer-sponsored car loans can certainly be convenient, but they tend to be best if you have excellent credit or if you’re buying a late-model car. To complete the sale and get the cars off the lot, dealers often offer valuable incentives if you finance the purchase through them. In some cases, you might even be able to get a zero-interest loan.
If your credit is less than stellar, a dealership might say you’re ineligible for a low-interest loan. You could still borrow money from the dealership, but you might be hit with high interest rates and more expensive payments.
For example, say you borrowed $20,000 at 2.00% APR, and had five years to pay it back. Your monthly payment would be $350 a month and you’d pay back just $21,033 in total.
However, if the dealership thinks you’re a risky borrower, you could be offered a loan with a much higher interest rate (if you got a loan at all). Say you get the same loan as above, but with an interest rate of 8.00%. At that rate, you’d pay $405 a month and pay $24,332 over the life of your loan.
2. Credit union loans
If you don’t qualify for a dealership’s promotional offers or low rates, the best way to finance a car could be through a credit union.
Credit unions are nonprofit organizations that work differently than traditional banks. That means they often have more generous loan acceptance rates and lower interest rates.
To finance a car with a credit union loan, you would need to visit the credit union either in person or online before going to the dealership. If the institution approves your loan application, it could take a few days to access the money.Although getting a loan through a credit union can take more time and work, it can be worth it to receive a loan at a cheaper rate.
Although getting a loan through a credit union can take more time and work, it can be worth it to receive a loan at a cheaper rate.
3. Conventional car loans
Many traditional banks offer loans specifically for buying a car. If you already have a savings or checking account with a bank, check out your local branch to see if they offer car loans as well. In some cases, banks are more willing to give loans to current customers, even when their credit isn’t perfect.
It’s a good idea to shop around with a few different banks to compare loan offers. Luckily, banks such as Chase and Capital One allow you to get auto loan quotes without negatively affecting your credit score.
Like credit union loans, you’ll need to complete a separate application and wait to be approved before you go to the car dealership. However, you might be able to get a lower rate or increase your chances of getting a loan by securing financing on your own.
4. Peer-to-peer loans
If you have a low credit score or issues on your credit report, one option to consider is peer-to-peer lending with a company such as LendingClub. With this structure, individual investors pool their resources to offer loans to people who need them.
Peer-to-peer loans usually have higher rates than conventional loans — especially if you have poor credit — but they could be a useful approach if you need a car now. And, you’ll typically pay less with a peer-to-peer loan than you would with a subprime loan, as described below.
5. Subprime loans
Lenders offer specific types of loans — known as subprime loans — for people with poor credit. These loans might not be the best way to finance a car, but they can get you the money you need to buy now.
Subprime lenders charge extremely high interest rates on their loans. In fact, you could end up paying upwards of 29.99%.
When you’re desperate for transportation, you might overlook the high rate and sign on the dotted line anyway. However, make sure you understand exactly what you’re borrowing.
For example, say you found a used car in good condition for $6,000. If you borrowed $6,000 at a 29.99% interest rate and had a five-year repayment period, your monthly payment would be $194 and you’d pay back $11,645 over the length of your loan — nearly double what you originally borrowed.
If there are any other options available to you, avoid these types of high-interest loans.
Do your homework before buying a car
Before ever setting foot in a car dealership, research your options and know what kind of financing you’re eligible for ahead of time. Identifying how to finance a car can help save you money over the long run.
Not sure where to start? Begin by figuring out just how much car you can afford.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.36% APR (with Auto Pay) to 7.82% APR (with Auto Pay). Variable rate loan rates range from 2.41% APR (with Auto Pay) to 6.99% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for SoFi.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.45% effective May 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.41% – 6.99%1||Undergrad & Graduate|
|2.41% – 7.89%2||Undergrad & Graduate|
|2.43% – 6.65%3||Undergrad & Graduate|
|2.38% – 6.81%4||Undergrad & Graduate|
|2.41% – 8.19%5||Undergrad & Graduate|
|2.60% – 9.60%6||Undergrad & Graduate|