What is the Best Kind of Loan to Buy a Car With?
The best loan for buying a car depends on your credit, budget, and whether you’re buying new or used. Here’s a breakdown of the main options.
Auto Loans
Auto loans are built for buying cars. You can get them from banks, credit unions, online lenders, and dealerships. Your credit score affects your interest rate. The better your credit, the lower your rate.
Credit Union Auto Loans
Credit unions usually offer the best interest rates. They’re not-for-profit, so they return profits to members through lower fees and better terms. They also tend to be more flexible if you don’t have perfect credit by looking at your history with the credit union, your job, and how you manage money—not just your credit score. To take advantage of the benefits of a credit union, you’ll need to qualify for membership first. If you’re already a member and have good credit, this is likely your best option.
Bank Auto Loans
Banks offer competitive rates for borrowers with strong credit. They might not beat credit unions when comparing interest rates, but they’re often better than what you’ll get at a dealership. Banks are a solid choice if your credit is good and you want to borrow from a well-known institution.
Dealer Financing
Dealers offer convenience. You can purchase the vehicle and finance it all in one place. But interest rates tend to be higher—unless you qualify for a special offer like 0% APR. You can also use loan offers from your credit union or bank as leverage to negotiate a better deal at the dealership.
Dealer financing may be easier to get if your credit isn’t great, since they work with subprime lenders, who are financial institutions that provide loans to borrowers with low credit scores or limited credit history. These loans are characterized by higher interest rates and fees because the borrowers are considered a higher risk for the lender.
Online Lenders
Online lenders offer fast approvals and digital convenience. Some platforms let you quickly compare multiple offers at once to help with research. These loans can be a good option if you have solid credit or want to shop rates easily. And because they have lower overhead costs, they can offer competitive rates to borrowers with good credit scores. Just know you won’t have face-to-face support.
Home Equity Loans or Line of Credit (HELOC)
Home equity loans or home equity lines of credit usually have lower interest rates because of longer repayment terms (usually 10 to 30 years), but they come with bigger risks. Taking out a loan means using your home as collateral. If you miss payments, you could face foreclosure. These loans also come with fees like appraisals and closing costs. Use this option only if you’re confident you can pay it off fast—and only if the rate is much better than an auto loan.
Personal Loan
These are personal unsecured loans, meaning they don’t require collateral. They’re good if you can’t qualify for an auto loan or if you’re buying from a private seller. You can also use them to buy older cars that don’t qualify for traditional auto loans. Rates are higher than auto loans, and the terms are shorter (usually 1 to 5 years), so your monthly payments may be higher. You also miss out on auto-specific protections like GAP insurance.
Securing an Auto Loan
If you have strong credit and are a member of a financial institution, check to see what benefits your membership can get you. Even having a rate quote can provide you with a stronger negotiating stance when going with dealership financing. For borrowers with below average credit, there are still options available. If you’re looking for an easy financing process with great rate, Community First Credit Union has an auto loans express team ready to help.
