When it comes to choosing the best auto loans, I took interest rates into account along with a few other factors to narrow down the list. Since your preferences will vary, I then broke my selections down into three categories to help you find the lender that’s right for you.
The Simple Dollar’s Picks for Best Auto Loan Companies
- Best Online Auto Loan Services: CarsDirect and MyAutoLoan
- Best of the Big Banks: LightStream, U.S. Bank, and Bank of America
- Best for Bad Credit: Auto Credit Express and Capital One
As of 2018, Americans have borrowed more than $1 trillion to finance their cars. A full 86% of new car buyers finance their purchase, according to Experian, with the average new car loan topping $30,300.
As I researched the best auto loan providers, I looked for ones that offered a wide range of loan types, quick approval, solid customer support and resources, and competitive interest rates. A lender such as LightStream fits the bill for those with excellent credit, while a more specialized lender like Auto Credit Express might be better a better pick for bad-credit borrowers. (If you have bad credit, you’ll also want to check out our guide to The Best Bad Credit Auto Loans to find lenders more suited to your situation.)
Best Online Auto Loan Services
CarsDirect is best known as a car-buying service, but it also provides a portal for getting the best auto loan. It provided a wider range of customer-friendly information than its competitors, including a loan calculator, trade-in-value calculator, and dozens of articles about car loans and buying strategies.
There’s also no minimum or maximum amount for which you can apply. For instance, some companies won’t allow you to apply for any less than a $5,000 or $10,000 loan, or won’t even consider a loan for a car with higher mileage.
A downside here (and for most online auto-loan services) is that after submitting your information, you may field calls or emails from lenders even after making your selection. And if you despise spam as much as I do, that might be a deal-breaker for you.
- Great for smaller-dollar car loans on an older or used car
- Provides educational resources to help borrowers make better decisions
- Anyone who is looking for a good refinancing option
- As a lead generator, they will pass on your contact information to lenders
- Could open you up to numerous calls from interested lenders
- Not the fastest site experience when buying direct online
MyAutoLoan also connects customers with lenders for all major loan types, with the added bonus of allowing applications for lease buyouts.
A handy interest-rate estimator helps you get an idea of what you should expect to pay for a loan based on your credit score, location, and type of loan. For example, if I’m looking at a $25,000 new car loan in Knoxville, Tenn., with excellent credit, I might expect an average APR of 3.11%, but if I’m looking at the same loan in Los Angeles with average credit, my average APR would be 7.42%.
There are extensive FAQs to answer customer questions such as “Will applying for a loan hurt my credit score?” and “Do I have to use the full loan amount?” There are also calculators that help you estimate what you can borrow and what your payment will be for a certain loan amount.
- Ideal for first-time buyers who want information on a good deal
- Quick turnaround on pre-approval process
- There is no application fee
- Your minimum monthly income must be $1,800
- You must apply for a minimum of $8,000 for a car eight years old (or newer)
- Your contact information could be shared with potential lenders
Best of the Big Banks
LightStream, an arm of SunTrust Bank, is a compelling option for customers with top-notch credit. Rates start at 3.09% APR (rates as of 6/20/18) for new cars and used cars purchased from dealers.
Depending on credit, LightStream offers secured and unsecured loans. LightStream will beat other lenders’ offers (view terms & conditions) and has a $100 guarantee for unsatisfied customers — if you’re unsatisfied within the first 30 days after getting a loan, they’ll give you $100 once you complete a service questionnaire.
The major downside here is that Lightstream is very picky about customers: Aside from good to excellent credit, you’ll likely need to show a very healthy income and assets to be approved. There’s also little in the way of car-buying advice on their site.
- Great pick for those with excellent credit
- Fast loan processing and turnaround
- Also ideal for vehicles like RVs or motorcycles
- Minor credit blemishes could disqualify you
- Not ideal for those seeking a brick-and-mortar experience
- Application could adversely impact your credit
U.S. Bank offers the best blend of loan options, competitive interest rates, and consumer-friendly information of the big-bank lenders. Its loan options include loans for cars purchased from private sellers, which many big banks shun. U.S. Bank also doesn’t automatically penalize used-car buyers with a higher interest rate, as long as the car is less than six years old and has fewer than 100,000 miles.
The auto-loan process is also very clearly detailed for prospective customers, and a special “green car” discount program reduces interest rates by 0.5% for buyers who choose certain fuel-efficient, EPA-certified “SmartWay” vehicles. If you’re afraid that might limit you to an electric car or a Toyota Prius, you may be pleasantly surprised at the number of qualifying vehicles: There are 25 options in the family sedan category alone for model year 2017.
- Peace of mind working with a large bank
- Potential interest-rate break for fuel-efficient vehicle
- Great source of funding if buying a vehicle from a private seller
- Not ideal if you are looking for a lease buyout
- Did not receive high marks in the J.D. Power’s customer satisfaction survey
- May not offer the best rates if you’re looking for an older, cheaper car
Bank of America
Bank of America provides all kinds of auto loans, including loans for cars purchased from private sellers and lease buyouts. The bank allows loans for vehicles up to 10 years old with 125,000 miles.
Interest rates are also competitive, and current Bank of America customers are eligible for interest-rate reductions. You can do business at one of more than 5,000 branches or manage your account with extensive online-banking tools.
However, customer service rankings aren’t the best, and you won’t be allowed to take your business to a number of independent car dealers that sell a variety of makes and models.
- Plenty of branches for anyone who wants to do business face-to-face
- Bank allows loans for higher-mileage and older vehicles
- No fees or prepayment penalties
- Does not provide financing for purchases at independent dealers
- Down payment may be necessary based on creditworthiness
- No online pre-approval
Best Auto Loans for Bad Credit
Auto Credit Express
Auto Credit Express specializes in helping car buyers with poor credit, and that knowledge often translates into more options and better interest rates. The company works with customers who have declared bankruptcy, and it allows loans to special-finance dealers. (These can include “buy here, pay here” and rent-to-own lots — not options we normally recommend, but if you’re truly in a bind, you may not have a choice.)
Auto Credit Express doesn’t restrict you from applying based on loan amount, vehicle age, or mileage, which is particularly crucial for bad-credit customers who may not be able to consider newer, pricier cars. The company has an A+ from the Better Business Bureau.
- A+ from the Better Business Bureau
- No restrictions from application based on loan amount, vehicle age, etc.
- Willing to work with you even if your credit isn’t the best
- You won’t get a loan to purchase from a private seller
If you prefer to keep your business with a household name, Capital One is worth a look. Capital One is one of the largest lenders willing to take on customers with less-than-stellar credit.
Interest rates are competitive, there are helpful loan calculators, and you can get pre-approved and compare payments on specific cars with the Auto Navigator tool. FAQs cover everything from what to expect at the dealer to what documentation you need to secure a loan. More than 12,000 dealers accept Capital One financing, and online account management tools are extensive. The bank allows loans for vehicles up to 10 years old with 125,000 miles.
- Willing to work with customers with poor credit
- Extensive branch network in mid-Atlantic and Southern states for face-to-face meetings
- Allows loans for vehicles up to 10 years old with 125,000 miles
- Might limit the type of car you can receive funding for
- Capital One will only make auto loans from $4,000 to $40,000
- Won’t make loans for private-seller transactions
Best Car Loans: Summed Up
|Auto Loans||Best For…|
|1||CarsDirect||Drivers who needs a small-dollar car loan or wants an older used car.|
|2||MyAutoLoan||First-time buyers or drivers who want to work with lenders to purchase their leased vehicle.|
|3||U.S. Bank||Drivers who want a loan to buy a vehicle from a private seller.|
|4||LightStream||Drivers who have good to excellent credit, substantial income, and want a loan fast.|
|5||Bank of America||Drivers who value Bank of America’s huge network of branches and/or want to buy a slightly older and higher-mileage vehicle.|
|6||Auto Credit Express||Bad-credit buyers who need a lot of options.|
|7||Capital One||Drivers in the mid-Atlantic and Southern regions who have bad credit.|
Seven Tips for Getting the Best Car Loan Rates
Now that you know some of the best spots to look for an loan, let’s talk about some more general strategies that you can exploit to make sure you land the best rates — wherever you decide to borrow.
#1: Shop around before you go to the dealer
Never assume the dealer will offer you the best rate, especially if your credit isn’t perfect. Compare interest rates from outside sources (banks, credit unions, online auto-loan companies) and get pre-approved for the best loan you can find before you head to the dealer.
Why is it important to get approved instead of relying on dealer financing? A few reasons:
- First, you’ll have more leverage to negotiate an even better rate with the dealer’s preferred lender, but the deal won’t depend on it.
- Second, you’ll know what kind of rates you should be able to get, so it will be easier to tell whether the dealer has added a markup on the interest rate they’re offering through whatever lender they’ve partnered with.
- Third, you know what you can comfortably afford going in, which reduces the chance that the dealer will upsell you on a more expensive car.
#2: Know your credit score
Your credit score is the single most important factor in what kind of interest rate you can land. Excellent credit means a better rate. Bad credit means a lousy rate — if you can qualify at all.
Check out the table of data below from myFICO for more of an idea on how your credit can affect your rate, which in turn affects what you pay each month and what you shell out over the life of the loan. The table assumes a $20,000 new-car loan with a four-year term.
Look at the stark difference between interest rates for customers with the highest credit and lowest credit scores. While an extra $100 a month for your car loan payment might not seem unreasonable, check out how it adds up over the long term: You’d be paying a premium of more than $5,000 if you have bad credit.
Use a service such as Credit Karma or Identity Guard to check on your credit score before you start shopping. Also, remember that when prospective lenders run a check your credit, your credit score can go down. If you limit your shopping to a two-week period, your score won’t take multiple hits, according to Bankrate.
#3: Sign up for a shorter loan term
As with any other loan, you’ll pay less in the long run if you can compress your payments into a shorter period. Check out the table below, based on data I obtained from this Bankrate calculator. It assumes a loan of $20,000 and an APR of 5%.
|36 months (3 years)||$599.42||$1,579.05|
|48 months (4 years)||$460.59||$2,108.12|
|60 months (5 years)||$377.42||$2,645.48|
|72 months (6 years)||$322.10||$3,191.10|
|84 months (7 years)||$282.68||$3,744.97|
While it might seem like a longer term is the way to go because of lower monthly payments — who wouldn’t want to pay under $300 versus nearly double that? — remember to consider the long term. If you could pay off your loan in three years, you’d pay just $1,579 in interest. If you opted for a lengthy seven-year term, you’ll be paying $3,745 in interest — more than twice as much — not to mention budgeting for a car payment for four extra years.
Beware of dealers who try to sell you on a car by showing you how low your monthly payment can be. This tactic simply boosts their bottom line by diverting your attention from the purchase price, driving it higher along with your loan amount.
#4: Buy new — maybe
It’s usually easier to land a better interest rate if you’re buying a new car instead of a used car. Average interest rates for used cars can be significantly higher than they are for new cars. That’s mainly because people seeking loans for used cars tend to have lower credit scores than people who need a new-car loan.
Of course, the fact that new cars lose so much of their value immediately after you take possession is still a compelling reason to look at used cars, and that’s the reason why they’re the best deal most of the time. But be sure to consider the better financing you might receive on a new car while you’re making your decision. Similar sticker prices — for instance, if you’re comparing a new mid-range car and a used luxury car — could tip the balance in favor of the new car.
#5: Don’t pay for ‘extras’ with your loan
Car dealers make a lot of money on all the little extras they will inevitably offer you. These extras could include extended warranties or upgrades like rust-proofing, fabric protection, and security systems.
Most experts warn that purchasing these add-ons rarely makes sense. But rolling them into your loan makes even less sense — the interest means you’ll be paying even more for these extras in the long run.
If there’s an add-on you must have, purchase it separately. For the same reason, consider paying sales taxes, registration fees, and other tacked-on expenses separately.
#6: Exploit interest-rate discounts
Many lenders will knock a little bit off your rate if you sign up for automatic payments or pay your bill online. Others may give you a discount if you have a previous banking relationship with them or you’re purchasing a specific type of car. Don’t assume you’ll be told of these potential savings — always ask.
#7: Consider 0% interest deals, but do your homework
You’re not going to find a 0% interest rate offer at banks or credit unions, but you may find them offered at the dealership by your car manufacturer’s lender. It sounds too good to be true, but if you have excellent credit, you may be able to nab such a deal.
However — and of course there’s a “however” with this deal — you may have to take a 0% interest deal instead of another promotion like a $1,500 rebate.
You’d have to do the math to figure out whether the 0% interest would save you more than $1,500 over the life of your loan, or whether you would be better off taking the rebate and using a low-interest loan on the reduced amount.
For instance, say I’m offered 0% financing for four years on a $20,000 loan. I would pay about $417 a month for those four years, according to this calculator at Edmunds.com. Alternatively, I might be offered $1,500 cash back and an APR of 2.99% on a loan of the same term. In that case, I’m actually only paying $409 a month. So despite the interest-rate hike, I come out $7 ahead each month because I reduced my loan principal from $20,000 to $18,500.
Also, be careful to check the loan terms with 0% deals — they tend to be shorter. The lender may only offer the deal for a three-year term, for instance. That means your monthly bills will be much higher than they would be if you opted for a loan with a longer term. You’ll pay less in the end, but you have to find room in your budget for the higher car payment.
How much should my down payment be?
- Most consumers pay an average 5% down payment
- We recommend 20% to help reduce monthly payments and APR
- Lenders may offer even more favorable terms if you put down more
Whether they’re buying a new or used car, most consumers pay an average 5% down payment. But if at all possible, consider saving up for a substantial down payment. We recommend around 20%. Here’s why.
The higher your down payment, the more you’ll be able to reduce your monthly payments and APR. And if you’re willing to make a substantial down payment, lenders may offer more favorable terms.
Let’s say you’re taking out an auto loan for $10,000. You’ve got a credit score of 680, which myFico reports as good. Your lender is willing to offer $10,000, to be paid back over 48 months with a 7.08% APR.
|Down Payment (on $10,000)||Monthly Payment||Total Interest|
Source: Bankrate Loan Calculator
With no initial down payment, your monthly payments will come to $239.83. You would pay $1,512.02 in interest over the course of your loan.
If you choose to put down an average down payment of 5%, you’ll reduce the principal by $500. That’s not a huge reduction: Monthly payments still come to $227.84 and you pay $1,436.42 in interest, a difference of $75 compared with a 0% down payment
But, if you come up with a 20% down payment, you’ll reduce the principal by $2,000. Your monthly payments will drop down to $191.87, and total interest will drop to $1,201.62.
Saving up for a larger down payment may seem daunting, but it’ll save more in the long run.
Can I get pre-approved for an auto loan?
- It’s not always wise to wait until you’re at the dealer to finance an auto loan
- Lenders might pull a hard inquiry on your credit history this late in the process
- Seeking pre-approval gives you more wiggle-room to negotiate price
- Seek pre-approval from a bank, credit union, or online lender
- Research your ideal vehicle including make, model, year, etc.
- Don’t forget to consider peer-to-peer lenders; some offer pre-approval
Waiting until you’re at the dealer to finance an auto loan isn’t always the best idea. You may not have as much control over the loan’s terms. This late in the process, lenders often pull a hard inquiry on your credit history, which may harm your credit score. In most cases, getting pre-approval from a lender involves a soft inquiry.
Pre-approval for one of the best auto loan rates puts you in a good position to negotiate price with the seller, since you’re a potential “cash buyer” who doesn’t need to finance through the dealership.
To get pre-approved for an auto loan, try a bank or credit union or online lender at the start of your shopping process. Have your personal identification ready (such as your driver’s license), along with your most recent financial information (pay stubs, W2 forms, credit score, etc.).
In addition, you should also research the model of car you’re looking for, and the average sticker price. Take note of available assets, especially an older vehicle you could trade in. Once you have that information handy, you’ll know how much to budget for.
Pre-approvals require soft pulls that usually do not harm your credit score. This gives you the ability to shop around for loans without damaging your credit history. If you do business with more than one bank or credit union, approach each one about their available rates.
You can also reach out to peer-to-peer lenders, who may provide options for borrowers whose credit scores are on the lower end. Some peer-to-peer lenders may even offer pre-approval.
Can’t I just get a loan from the dealer?
- Most dealers prefer this route…but you probably won’t get the best deal
- Many dealers make more money through dealer-financed auto loans
- Dealers usually act as aggregators setting you up with lending partners
- Dealers can increase the interest rate (this is called markup)
Most dealerships actually prefer that you get a loan directly from them, though if you do you’re probably not getting the best deal.
Believe it or not, dealers don’t make much money from just selling cars. According to CarGurus, gross profits from a car sale total around $2,000, but dealers usually experience a net loss of $200.
Instead, dealers make their money in other ways. For example, whenever dealers sell a new car, they recieve “holdback” fees from manufacturers. But the primary way dealers make money is via dealer-financed auto loans.
Unlike a bank or credit union, car dealerships usually aren’t direct lenders. They act as aggregators, pairing your loan with one of their lending partners. When one of their partners chooses to finance your loan, they also charge a “buy rate” to the dealer.
What is a buy rate?
According to the Consumer Finance Protection Bureau, a buy rate is “the interest rate that a potential lender quotes to your dealer when you apply for dealer-arranged financing”. In other words, it’s the base rate that already exists on the interest.
But dealers can increase the interest rate. The final interest rate you see on your loan might be higher than what the lender originally offered. The new rate is called a “markup” or a “contract rate.” And the extra interest you pay usually goes to the dealer.
Choosing to finance with a dealer can be a solid option for financing a new car. But banks, credit unions, and personal lenders may offer you a loan with better terms. And if you get pre-approved for a third-party loan, you’ll have a lot more leeway when it’s time to negotiate with your dealer.
How is interest calculated on auto loans?
- There are two different ways interest can be calculated: Simple and pre-computed
- Simple interest loans offer dynamic principal to interest ratio based on amount owed
- Pre-computed interest loans offer fixed rates
When it comes to auto loans, there are two different ways that interest can be calculated: Simple interest loans and pre-computed interest loans.
Simple interest loans offer a dynamic principal to interest ratio that changes based on the amount of principal owed, while pre-computed interest loans offer fixed rates.
Simple interest loans
In a simple interest auto loan, interest is calculated only on the principal still owed on the loan. Instead of paying a locked rate, interest is amortized —meaning that the more you pay down the principal, the less interest you will be charged.
Because simple interest is amortized, you’ll be paying more in interest than principal at the start of your loan. But as you pay down your principal amount, the less interest you pay, until your payments go more towards principal than they do interest. However, monthly payments remain the same.
Anyone with a simple interest loan can reduce the interest they’ll have to pay by contributing a little extra towards the principal whenever possible.
If you do choose a simple interest loan, be sure to carefully consider the length of your loan. While longer loans will net you a smaller monthly cost, less money will go towards the principal, and thus you’ll end up paying more in the long run.
Pre-computed interest loans
Pre-computed interest loans much more resemble a personal or other fixed-rate loan. Instead of a more dynamic interest-principal ratio, buyers are required to stick to a fixed payment schedule.
Monthly payments have a fixed ratio towards interest and principal. While pre-computed interest loans can seem like the most secure choice, they don’t make as much sense for someone that wants the ability to pay their car off early.
How I Picked the Best Auto Loans
Most people choose their auto-loan company based on who provides the lowest interest rates. Of course, whether you can land a competitive interest rate largely depends on your credit and the car you’re buying. For that reason, I considered many other factors besides interest rates, which I’ll detail further down.
You won’t want to overlook local banks and credit unions in your search. There is a lot of competition for auto loans, so you may be able to find competitive rates locally with the added benefit of a firm handshake, better customer service, and a personal relationship with your lender.
Credit unions can be a particularly good place to look. As nonprofits, they have lower overhead (which can mean better interest rates) and lower fees. On the downside, your loan application and approval process may be a bit more lengthy or cumbersome.
Finally, I did not look at manufacturer-specific lenders such as Ford Credit or Honda Financial Services. These lenders tend to be rated more highly than general lenders for overall customer satisfaction, so they are certainly worth a look if they can give you the best interest rate on the car you want. However, because they restrict their services to one manufacturer, I did not include them in my analysis.
The best auto loan lenders and services provided:
- All or most major loan types: The best lenders offer loans for new and used cars, refinancing, and (less commonly) lease buyouts. Used-car loans are available even when you’re buying from a private party, not just a dealer.
- Instant or same-day online approval: You’re probably eager to get your hands on a new (or new-to-you) car. Chances are you don’t want to wait around for a lender to get back to you. I also immediately discounted lenders who do not allow customers to at least begin the approval process online.
- Online payment calculators and other resources: The best lenders provided calculators for prospective customers to calculate their monthly payment at certain interest rates and repayment terms. Bonus points went to lenders who also offered tools to help determine the worth of a trade-in vehicle or general car shopping tips.
- Comprehensive customer support: The best lenders had very detailed FAQs (frequently asked questions) as well as multiple methods of contact for customer support (such as email, phone, and online chat).
- Competitive interest rates: Advertised interest rates from the best lenders had to significantly beat Bankrate’s national average for new and used cars.
- Solid customer service: I considered how lenders fared in J.D. Power’s 2017 Consumer Financing Satisfaction Study, if applicable. While I looked at online reviews, I didn’t give them much weight (the majority of complaints about car loans are from customers who were denied based on highly personal factors, including their credit).
You’re in the Driver’s Seat When Shopping for the Best Car Loans
Whether or not you’re a buyer with perfect credit, competition for the best car loans is fierce. Use that to your advantage by doing a lot of comparison shopping before you sign on the dotted line.
Remember to look up your most recent credit score, consider possible discounts and loan terms, and be aware of how every piece of the puzzle can affect your bottom line. Consider beginning your search with the companies profiled above — all are solid choices.
If your credit is less than perfect, our guide to the Best Bad Credit Auto Loans will give you more options and tips on shopping strategies, including how to avoid scams. While you may pay a higher interest rate, you’ll be pleased to know that competition for your business is still heavy.
Once you’ve found a great car and a great loan, make sure you have the right car insurance. Our guide to the Best Car Insurance Companies can help you separate the best companies from the rest in a crowded market. Its companion article, How to Get Cheap Car Insurance, takes a more in-depth look at strategies you can use to keep your insurance bill low, no matter what company you use.