You’ve determined how much you can afford to spend. Now it’s time to explore your loan choices.
While some consumers are able to pay cash for their new vehicle, most consumers use financing. Understanding the loan process and knowing your choices will help you save money. For example, bringing a loan quote from a bank, credit union, or other lender to the dealer can place you in a stronger bargaining position to negotiate good financing terms with the dealer. Then you can choose whether you stick with the offer you brought in or accept the dealer’s financing.
Know the sources of auto financing… You can shop around for auto financing even before you shop for a vehicle. Banks, credit unions, and dealerships are the most common places to finance an auto loan. While shopping for auto loans is complicated, finding and comparing your choices can help you improve the deal that you will get. Consider getting one or more loan quotes from a bank, credit union or other lender before going to the dealership. It will put you in a better bargaining position and could save you hundreds or even thousands of dollars over the life of your loan.
Auto loans from a bank, credit union, or nonbank auto finance companies… You can obtain a quote or preapproval on an auto loan from a bank, credit union, or other lender before selecting a vehicle. You can also check out nonbank lenders and online lenders as potential lenders. Although it might be helpful if you already have an established relationship with a lender, you don’t have to have an account with these lenders in order to apply for an auto loan. These lenders can “preapprove” you. The preapproval will give you a loan quote with an interest rate, loan length, and maximum loan amount based on your creditworthiness, the terms of the loan, and the type of vehicle you have in mind. The rate and terms you are offered may be negotiable.
Dealer-arranged financing… Here you obtain financing from a lender through a dealership. With dealer arranged financing, the dealer collects information from you and forwards that information to one or more prospective auto lenders. If the lender(s) agrees to finance your loan, they may authorize or quote a rate to the dealer to finance the loan, referred to as the buy rate. The interest rate that you negotiate with the dealer may be higher than the buy rate because it may include an amount that compensates the dealer for handling the financing. Dealers may have discretion to charge you more than the buy rate they receive from a lender, so you may be able to negotiate the interest rate the dealer quotes to you. Ask or negotiate for a loan with better terms. After the auto purchase is finalized, a dealer-arranged loan may then be sold to a lender who has already indicated a willingness to extend the credit. That lender may own your loan and collect the monthly payments, or transfer those responsibilities and rights to other companies. Learn more about buy rate at consumerfinance.gov/askcfpb/727.
“Buy Here Pay Here” dealership financing… Some types of dealerships finance auto loans “in-house” to borrowers with no credit or poor credit. At “Buy Here Pay Here” dealerships, you might see signs with messages like “No Credit, No Problem!” The interest rate on loans from these dealerships can be higher than loans from a bank, credit union, or other type of lender. You may want to consider whether the cost of the loan outweighs the benefit of buying the vehicle. Even if you have poor or no credit, it may be worth it to see if there is a bank, credit union, other lender, or another dealer that is willing to make a loan to you. A feature of this type of dealership is that your monthly payment is made to the dealership. Some “Buy Here Pay Here” dealerships, and some other lenders that lend to people with no credit or poor credit, may put devices in the vehicle that help them repossess or disable the vehicle if you miss a payment.
Negotiate interest rates… In general, lenders and dealers are not required to offer the best interest rates available. You may be able to save a lot of money over the life of the loan by negotiating the interest rate with the lender or dealer.
Understand how leasing works… Leasing is an alternative that some people choose. A lease is an agreement to pay to use a vehicle for an agreed number of months and/or miles. If you lease a vehicle, you do not own it and you will be required to return the vehicle after the lease ends, unless your contract includes a purchase option and you choose to pay to exercise that option. If you are considering leasing, carefully compare the costs of leasing and buying. Complete information about leasing a vehicle is outside the scope of this consumer guide on auto loans. Learn more about leasing at consumerfinance.gov/askcfpb or check out the Federal Reserve’s consumer guide, “Keys to Vehicle Leasing,” at federalreserve.gov/pubs/leasing.
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