Where to Shop for a Car Loan

There are many advantages to shopping around for auto loans and lining up financing before striking a deal on a car.

Loan shopping gives buyers the chance to compare interest rates. Those rates can vary a lot, regardless of credit standing. The wider the net is cast, the better the chance of landing a bargain.

Second, getting preapproved buys peace of mind. While the deal may not be the best possible, buyers will at least know they have enough money to cover the purchase, the interest rate, and the loan term.

To get preapproved, buyers must have a pretty good idea of what the new car will cost, including all taxes and fees. Deduct the down payment to determine how much the loan will be.

Once the lender approves the loan amount, say $25,000, it will give the buyer a blank check good for any amount up to that limit. The check can be returned if a better deal becomes available elsewhere, such as through the dealer. There may be fees involved in returning a check, though, so read the fine print before agreeing to any deal.

Keep in mind that each time a consumer applies for new credit, their score is slightly lowered for a limited period. But credit bureaus treat a cluster of auto-loan applications occurring in a short period as a single application rather than several, and the negative affect should be minor and short-lived. Loan aggregators such as E-Loan and Clearlane make this easy by pulling a person’s credit score once and using it across the various lending institutions they work with. Still, try to keep all loan applications confined to a short time period, about 30 days. 

Dealers typically work with their automaker’s financing group, known as captive finance, as well as banks and other sources. Shoppers with offers from some of the other sources we’ve mentioned may be able to negotiate the dealer’s initial loan quote down to a more attractive amount. That’s why it’s important to do research.

Pros
• Convenient to use since you are already at the dealer
• Manufacturer financing is often subsidized, so captives often offer some of the lowest auto loan rates available
• Dealer loans through banks are open to people who have lower credit scores

Cons
• The interest rates for dealer loans through a bank are often marked up to give the dealer a profit
• With dealer loans through a bank, buyers with low credit scores will pay a high annual percentage rate (APR)
• Manufacturer-backed loan rates are available only to customers with high credit scores
• With manufacturer financing, if both a rebate and a low interest rate are offered, buyers can usually choose only one

Banks generally have very specific, conservative loan policies, and some may cater only to those borrowers with a better credit standing. These institutions are well-positioned to offer very competitive loan rates. Offerings vary tremendously, though, and some banks are more willing than others to make loans to people with marginal credit.

Because a car shopper likely already has a relationship with at least one bank, the local branch might be a good place to start. Most banks have websites that make it easy to check their current loan rates, and shoppers can apply for a loan either online or at a local branch. Visiting the branch is a good way to avoid any mistakes or misunderstandings, and might result in an even better offer.

Pros
• State-of-the-art digital banking platforms and security systems for shopper data
• May offer competitive loan rates to qualified applicants
• Local banks have more personalized knowledge of customers

Cons
• Conservative loan policies may prevent people with low credit scores from getting or even applying for a loan
• High fees may be charged on loans
• Baseline rates for non-members are often higher and less flexible than other options

These lenders operate a bit like banks, but they are usually nonprofits owned by their depositors and have lower operating costs than banks. Many credit unions lend money only to their members. However, some will make loans to people who don’t have deposit accounts with them. The website credit.com maintains links to several credit unions that will make loans to the general public.

Pros
• Lower interest rates on loans and credit cards
• Easy loan applications
• Better, more personalized service
• Often better represented than traditional banks in underserved communities

Cons
• Many are linked to employers or a group, which limits who can become a member
• Credit unions still have fees, albeit lower ones than banks
• The average credit union has only three branches
• Tend to trail banks in digital offerings

This is a very convenient way to borrow money, and it’s easy to find competitive rates. Sites such as Clearlane (operated by Ally Bank), E-Loan, and LendingTree farm out requests to numerous lenders and usually provide you with several competing offers. Individual lenders such as Capital One, Wells Fargo, and Chase also have online loan operations.

As a precaution, check the Better Business Bureau rating for every lender you contact before you file an online application.

Pros
• Ability to apply to many lenders at once without creating an outsized impact on your credit score
• Interest rates may be more competitive than those offered by traditional banks

Cons
• Difficulty reaching a person for customer assistance
• Difficulty controlling how the company shares customers’ personal information
• Customers may be bombarded with email and phone calls from different lenders
• Possible high fees and/or loan prepayment penalties