Few people have enough cash to buy a car on their own. In the second quarter of 2020, 85% of new cars and 36% of used cars were financed. The newer the car, the more likely you are to need a loan.
To find auto financing, online lenders, your neighborhood bank, or the auto dealership where you’ve found a car you want can help put you behind the wheelquickly and can make a car affordable with monthly payments. Here are some of the best auto lenders with the best car loan rates.
Overview of the best auto loans
|Bank of America||Streamlined purchases|
|Capital One||Pre-qualify online|
|LightStream||No vehicle restrictions|
|PenFed Credit Union||Low rates|
|U.S. Bank||New cars|
Best auto loans
Bank of America
An auto loan from Bank of America can be appealing for many reasons. To start, it’s one of the biggest banks in the country with offices you can visit to work with a loan officer in person to get an auto loan.
It offers five types of auto loans: new and used cars from dealers, refinance, buying out a lease, and for a private party sale. Its rates are transparent and terms and other information is available on its website.
Bank of America customers get discounts of 0.25% to 0.5% on auto loans, depending on what types of accounts they already have with the bank.
A factor that sets it apart, we think, is its streamlined purchase experience through its network of authorized dealers. If you buy a car from an auto dealer authorized by Bank of America, you’ll receive an approval code that lets the dealers retrieve your information and streamline the purchase. You won’t have to haggle over financing and the overall sale should take less time.
Capital One isn’t very transparent in listing auto loan rates on its website. However, third-party websites have listed the estimated APR starting at 2.99%, though we can’t be sure if that is still accurate.
Instead of easily finding starting rates online so you can quickly compare lenders, Capital One requires potential customers to pre-qualify for financing through its Auto Navigator application. This can be good for consumers who want to walk into a dealer and be pre-approved for a loan, or at least have a preliminary idea of what their loan terms will be.
Filling out an application doesn’t affect a credit score. It shows pre-qualified offer terms after you enter some basic information.
The pre-qualified offer gives you a baseline financing rate. Cars financed through Capital One must be bought from dealerships it works with.
If you pre-qualify for a loan, you must fill out a credit application at the dealership, and not online. This requires a hard credit pull, which can temporarily lower your credit score. If the interest rate from Capital One isn’t low enough for you, the dealership can meet or beat it.
We’ll take discounts wherever we can find them, and LightStream offers auto loans discounted by 0.5% when having autopay.
Automatic payments make sense for many reasons, such as guaranteeing your payment will arrive on time. But an APR discount is an incentive that’s worth a little extra money in your pocket, if not the peace of mind of knowing you won’t face a late payment fee.
An auto loan calculator can show you how much money you can save with a slightly lower interest rate. A 0.50% discount doesn’t add up to much money, but it’s better than nothing.
One of the best advantages of a LightStream loan is that it doesn’t limit you to a certain make, model, or mileage amount, as some lenders do. It offers a range of auto loans, including classic cars. It even offers unsecured loans to borrowers with excellent credit.
Lightstream is very transparent about its rates and terms, which makes comparison shopping easier. LightStream’s application process is entirely online, and is easy to get through. Loan funds can be directly deposited to a borrower’s bank account as soon as the same day the loan is funded.
MyAutoLoan is an online marketplace to compare auto loan offers from multiple lenders. You pick the loan offer that best fits your needs.
MyAutoLoan specializes in helping customers with bad credit, and a credit score of at least 575 is recommended. On the FICO score range, that’s considered very poor.
Up to four offers are available within minutes of completing an online application. Qualified borrowers can avoid making payments for up to 90 days. If approved for a loan, an online certificate or check can be sent to you within 24 hours.
The website has an auto loan calculator to quickly get an idea of how much your monthly payment would be. It also has an interest rate estimator that uses your credit score range, ZIP code and other information to the typical interest rate you’ll be offered from its lenders. Check its interest rate chart for the latest starting rate offerings.
AutoPay is another online marketplace where consumers can shop for the best deal from many lenders.
AutoPay’s main benefit seems to be refinancing, with auto refinancing rates as low as 1.99%. However, its rates aren’t totally transparent. Borrowers can calculate their refinance savings on a calculator on its site, but it doesn’t break down what interest rates start at for new or used car loans. We assume at 1.99% APR, but it’s unclear.
But if you have excellent credit and want to refinance a high-rate car loan into a lower rate, AutoPay is a good option.
The website is also unclear how much of a discount it offers for customers with autopay. But it does say that based on actual autopay refinances, which we assume means they’re getting a discount, that the average customer sees their rates cut in half. It cites the example of dropping from 11.52% to a 5.72% interest rate.
AutoPay also has cash-back refinancing with up to $12,000 in cashback. And it has lease payoff financing to keep your car at the end of the base term and pay off the lease early.
PenFed Credit Union
Credit unions can offer excellent interest rates on all types of loans, including auto loans. PenFed Credit Union has the lowest interest rates we could find, though you’ll need to have excellent credit to get its best rates.
Shorter loan terms usually equate to lower interest rates. To get its lowest rate of 1.39% APR for a loan on a new car, borrowers must have a term of 36 months.
They must also buy a car from a car buying service that PenFed does business with, which gives them a 0.75% discount from the 2.14% APR if offers for a new auto loan elsewhere. Either way, those are the lowest rates we found. It offers the same discount on used cars as the car buying service TrueCar.
To get these great rates, you must be a member of PenFed, whose formal name is Pentagon Federal Credit Union. The credit union is headquartered in McLean, Va., and has more than 1.8 million members.
Most of PenFed’s members are affiliated with the military, though military service isn’t a requirement for membership. Without a military relationship, applicants can meet the eligibility standards by joining affiliated advocacy groups, such as groups that support American troops.
New and used auto loan rates at U.S. Bank are competitive and vary by a borrower’s credit score and other data, but they come with a list of caveats.
To qualify for the best rate on a new car loan, which is currently 2.59% APR, the loan must include:
- A term of 36 months or less
- A loan of $30,000 or more
- Financing 80% or less of the car’s value
- 800 credit score or higher
- Vehicle less than 12 months old
- Automatic payments from a U.S. Bank account
Used car loans have the same requirements to get the best interest rate. Finding a used car that’s less than a year old may not be too easy, and especially one if a $24,000 loan must be financed.
All of this means having a big down payment, though the bank’s website says that up to 120% of a car’s value can be borrowed with no down payment required.
Again, all of these requirements are for getting the best loan rates. Used car loans can still be made for cars older than six model years, though they’ll likely be at higher interest rates.
Summary of the best auto loans
|Lender||New car APR||Used car APR||Minimum loan||Term||Extra discount|
|Bank of America||2.59%||2.89%||$7,500||12-75 mos||0.25% - 0.5%|
|Capital One||N/A||N/A||$4,000||24-84 mos||None|
|U.S. Bank||2.59%||2.59%||$30,000||12-72 mos||0|
Note: The annual percentage rates listed are where they start from, and are accurate as of Dec. 10, 2020. They’re based on excellent credit history and other factors such as a short loan term and moderate amount borrowed. Some rates include discounts for autopay.
How much money will I need?
How much you need depends on your budget and what type of car you want — will you be purchasing a new vehicle or a used vehicle? It’s a good idea to do some research on how much cars you like cost. The average price for a new light vehicle (meaning not a truck) in January 2020 was $37,851, according to Kelley Blue Book.
The credit reporting agency Experian reports that the average loan for a new car is $36,072, with an average monthly payment of $568. Borrowers are choosing longer loan terms, an average of 71 months, while the average auto loan has fallen to 5.15%, according to Experian.
Used cars are cheaper. The average used car loan is for $20,916, Experian says, with monthly payments averaging $397. Their average loan is for 65 months.
When using a lender’s auto loan calculator, including the cost of your car and how many months you want the loan for. A longer loan will obviously lead to higher interest paid, but the monthly payments may be more affordable.
One way to borrow less money is to have a bigger down payment. Auto loan calculators can help you find a loan that fits your budget by showing you how much more of a down payment will lower the monthly loan payment.
But your financing also depends on your credit report. It may be wise to work with a financial institution for preapproval. By knowing how much you are guaranteed to get, you can shop based on what you know you can afford. If you have poor credit, you may still qualify for a loan, just at higher rates. If this is the case, you may want to consider having a cosigner with better credit help you. If you have good credit, you'll get the best auto loan rates and may want to check with different lenders on their best rates and choose the one that gives you the most competitive rates.
Do lenders restrict the type of vehicle I can buy?
Car prices depreciate quickly and older used cars can be worth much less than newer ones. After a few years of loan payments, you could end up owing more on a car loan than what the car is worth, which is called being upside down on a loan.
Lenders want to prevent this because it can lead to borrowers not paying their loans. Why pay off a $5,000 left on a loan if your car is only worth half that?
Some lenders limit auto loans by a car’s age, mileage, and value. Bank of America, for example, doesn’t lend for vehicles older than 10 years, with 125,000 miles or more, or for a loan amount of less than $7,500.
Capital One requires vehicles to be 2010 model year or newer and have less than 120,000 miles. It doesn’t finance certain makes of cars, including Oldsmobile, Daewoo, Saab, Suzuki, or Isuzu vehicles.
Can I pay my loan off early?
Most auto loans don’t charge a repayment fee for paying off the loan early. Ask your lender if this fee exists before you sign loan documents.
One that does, however, is U.S. Bank. It charges a prepayment penalty of 1% of the original loan amount if you pay off the loan within one year. The minimum fee is $50 and the maximum is $100.
What about a loan from an auto dealer?
From time to time you may see car dealer ads for 0% financing. That’s a lot better than paying 5% or any amount on a car loan.
Those loans are usually for people with excellent credit, and even then there may be restrictions. If you can get a 0% loan from a dealer, it’s probably going to be the best loan you’ll ever find.
Auto dealer financing can also beat bank loans with lower rates, even if they can’t hit 0%. This is why one of the first questions you’ll hear from a salesperson is if you have financing yet.
You should be aware that dealers sometimes mark up a loan’s interest rate in exchange for financing your loan. This can make a bank loan cheaper.
It’s a good idea to go in with financing approval that you’ve found elsewhere on your own. It lets the dealer know you’re ready to buy and can give them a chance to beat your offer.
Do your homework first by filling out a few online applications at lenders we’ve recommended, and research what your credit score is. You don’t want to fall in love with a car and accept a dealer’s financing before comparing loan options elsewhere.
Should I get a personal loan?
You can pay for a car in a number of ways, including a personal loan that can be used for almost any expense. However, they usually have higher interest rates than auto loans because most personal loans don’t require collateral.
Auto loans are secured loans. The car you’re buying is the collateral in a car loan. That means if you don’t make the payments, the lender could have the car repossessed from you, and you’d still be liable for the payments.
Auto loans are usually easier to get than personal loans, especially for people with bad credit.
Why you should use auto loans
An auto loan may be one of the least expensive loans you’ll ever have in your life, though that doesn’t mean it will be easy to pay. The average monthly payment on a new auto loan is $568, which isn’t cheap for most people.
Still, auto loans can make a car affordable with equal monthly payments that can fit almost any budget. Even if you have bad credit, you should still be able to qualify for an auto loan.
To get the best auto loan interest rate, it helps to have a high credit score, a loan term of 36 months or less, a high down payment, and an affordable car.
Why you shouldn’t use auto loans
If you can’t afford to make the monthly payment set up in an auto loan, then you shouldn’t take one on.
Instead, find financing elsewhere or at least shop for a cheaper car or save for a bigger down payment.
It’s hard for many people to get through daily life without a car, but consider your options. Maybe you can take public transportation, or repair your current car enough so that it will hopefully last a few more years.
Auto loans can last as long as seven years. That’s a long time to have a monthly car payment, especially if the car isn’t working so well in six or seven years. You could end up owing more than the value of the car, which might discourage you from making loan payments. If you do, then the lender could take the car and you’d still be liable for payments.
The bottom line
Even though most auto loan interest rates are low right now, it can pay to shop for the best loan rate.
Don’t let the low rates that banks, credit unions and other lenders advertise convince you that the low rates you see will be what you’ll qualify for. They’re meant for borrowers with the best credit scores, shortest loan terms, and mid-priced cars, among other factors.
Know your credit score before you start shopping for a car loan, and check at a few lenders to see what rate they’ll charge you. Some lenders offer discounts for using autopay and shopping with car dealers they do business with, so be sure to shop for the best car price too.