With so many lenders offering different interest rates, terms, and other perks; car loans can get confusing. Fortunately, it only takes a few simple steps to find which bank or credit union can help you secure the best auto loan.
This article will explain what to look for when applying for a car loan and list some of the best auto loan lenders today.
Which Bank Is Best for a Car Loan?
With car prices reaching record highs, more and more Americans are looking to take out an auto loan. You may know what type of car you want, but how do you know which lender is best for you?
Car loans are available from dealerships, banks, credit unions, and online lenders. And just like car shopping, it’s essential to shop around to find the best interest rates and terms for your future car loan. Not all institutions will offer you the same loan options.
In addition to low rates, look for lenders that keep fees to a minimum and offer repayment terms that suit your needs. Keep in mind that the lowest rates do not always equal the best deal.
You may be inclined to go for a longer term in order to secure a lower monthly payment. A lower monthly payment may sound ideal, but keeping the bigger picture in mind is important.
6 Best Auto Loan Lenders for 2023
Here are some of the best banks and credit unions for car loans today:
1. PenFed Credit Union
🏆 Lowest auto loan rates
PenFed Credit Union has one of the lowest annual percentage rates for any bank, credit union, or loan company at this time. PenFed Credit Union works with TrueCar to show you vehicles in your area for sale.
With an advertised rate of 2.09% APR, this lower rate only applies to borrowers who use PenFed’s car buying service to purchase a new vehicle with a 36-month loan term.
If you purchase a car without this service, loan rates start at 2.89% APR. Used car loans start at 3.29% APR using the buying service and 3.69% APR otherwise. In order to apply for a car loan with PenFed Credit Union, you need to have a membership and a $5 deposit.
2. Bank of America
🏆 Best for new car loans
As one of the “Big Four” national banks, Bank of America (BoA) works with a vast network of dealerships across the country, making it a widely-popular option.
Bank of America offers a range of car loan types, from new car loans to used car loans, lease buyouts, and refinancing.
A 3.69% APR for new car loans is available to borrowers with an excellent credit score. Used car loan rates start as low as 3.89%. If you’re a Bank of America Preferred Rewards member, you can qualify for an interest rate discount of up to 0.5%.
Refinance loans at BoA also start at 4.79%. However, it does not finance vehicles older than 10 years or with more than 125,000 miles on the odometer. The bank also does not finance cars under $6,000 in value or alternative vehicles such as motorcycles and RVs.
3. Consumers Credit Union
🏆 Best for competitive rates
This credit union offers low rates on car loans for those with good to excellent credit. Membership is open to anyone who pays a $5 fee and keeps at least $5 in a savings account. Like PenFed, Consumers Credit Union partners with TrueCar to help borrowers find vehicles from across the country.
Rates at Consumers Credit Union start at 3.19% APR for new and used car loans.
Consumers Credit Union offers a 0.25% discount on the rate for using autopay and an extra 0.25% discount when the automatic payment is linked to a Consumers Credit Union account.
🏆 Best rates for private-party car loans
LightStream, founded in 2004, is the online lending division of Truist Bank. LightStream offers car loans to all types of people with good or excellent credit. There are no age or mileage restrictions for the financed vehicles.
LightStream offers rates as low as 3.49% APR for both new and used car loans, including a discount for automatic payments. Without automatic payments, the rate is 0.5% higher. LightStream also offers these rates on private-party loans if you agree to automatic payments.
If you were approved for a lower rate with a competing lender under the same terms and can prove it, LightStream will offer you a rate of 0.1% below the competitor’s rate.
These rates are only applicable when you borrow between $10,000 and $24,999. The minimum amount you can borrow on a LightStream car loan is $5,000.
🏆 Best for low rates on used car loans
Although Chase does not list its auto loan rates, they are estimated to be as low as 2.74% APR. To apply for a car loan from Chase, you must finance a car from a dealership in the bank’s network. One nice perk is that Chase doesn’t require a down payment on auto loans.
Chase Private Clients can apply for an interest rate discount of 0.25%. However, to be eligible, you need to have an average daily balance of at least $150,000 in qualifying deposit and investment accounts.
Auto financing APRs begin at 4.84% for 48 months and 4.69% for a term of 72 months, but these terms are reserved for those with an excellent credit score. The minimum amount you can take out on a Chase car loan is $7,500, and the maximum is $100,000.
🏆 Best for online used car loans
Carvana is an online used-car retailer that also offers financing for the vehicles it sells. Car loans are only available on vehicles sold through Carvana.
According to the company website, estimated rates start at 3.90% APR. The minimum amount for a car loan is lower than other lenders, starting at $1,000, and the application process takes place 100% online. But keep in mind that Carvana does not allow loan co-signers, which eliminates an option to help some borrowers qualify.
How do car loans work?
Car loans (also called auto loans) are secured loans that you can use to pay for a new or used car or buy out your car lease. You can also refinance your existing car loan by taking out a new one.
At the most basic level, a car loan is a lump sum of money you borrow to buy a car. You then pay back the borrowed money with interest over time via monthly payments. Your loan amount, term, (how long you take to pay it back), and interest rate will all affect your monthly payment amount.
Until the total amount borrowed in the car loan is repaid, the lender (usually a bank or finance company) holds the title to the car. In addition to car loans, there is also car financing, which includes leasing a vehicle or refinancing your current loan to a new one with a better rate.
Auto loan rates & terms
Car loans come with fixed interest rates and loan terms, usually ranging from two to seven years. Depending on your auto loan, you’ll be asked to pay a monthly payment with a fixed interest rate from anywhere between 24 to 84 months.
Several different financial factors determine auto loan interest rates. This includes your credit history, income, other debts, cash on hand, loan amount, and term.
Banks and lenders will also look at your debt-to-income ratio before offering financing options. If you have too high debt versus your income, lenders will likely see you as high risk and charge a higher interest rate. Or they may require a shorter loan term or a larger down payment.
If you are hoping to qualify for the best auto loan rates, having an excellent credit score is important. The better your credit, the lower your interest rate. But even if your credit isn’t top-notch, some lenders are willing to offer interest rate discounts and other terms that could help you secure the best auto loan.
Applying for a car loan
To be eligible for an auto loan, you first need to apply for one and be approved by a lender.
You can apply at car dealerships, banks, credit unions, and even with online lenders. Many banks or lenders may give you preapproval for a loan and an estimated interest rate based on your credit history and answers to a few simple questions.
Here are a few factors to consider:
Lenders will look at your credit score based on the credit history in your report and credit card usage. Many use this to assess how creditworthy you are, how much or how little they may be willing to lend you, and under what conditions.
Having extra money in hand to make a down payment can also positively affect your car loan. It can reduce your overall loan amount, which means less of a risk for the lender. Usually, the bigger the down payment and the smaller the loan amount is, the more favorable your loan options are.
It is also possible to negotiate your own terms depending on your lender. Many banks and lenders compete by offering low-interest rates, especially if they consider you to be a dependable borrower.
Keep in mind that interest rates for auto loans do not include loan fees.
As an auto loan is a secured loan, they tend to have lower interest rates than other unsecured loans, like a personal loan. There are different auto loan options depending on the terms. The average annual percentage rate (APR) varies between new cars and used cars and the loan length.
The main takeaway is that the APR is mostly based on your credit score and credit history. The better your credit score, the lower your APR.
Before approving your car loan, your bank or lender will request proof of the required insurance coverage. Your insurance company should send verification once you put the vehicle on your policy and provide the lender’s information.
Remember, most auto loans are secured and require you to use the car you purchase as collateral for the loan. If you don’t repay the loan, you risk having your vehicle repossessed.
However, having collateral usually helps you qualify for lower interest rates and better auto loan terms.
Once you’ve settled upon loan terms and your car loan application has been approved, you can purchase your car. Afterward, you will receive repayment information from your lender via mail or email.
Many lenders offer an interest rate discount if you agree to automatic monthly payments.
How Do Car Loan Payments Work?
Your monthly car payment serves to pay back the loan amount, interest rates, and fees.
Let’s look at how these aspects can impact your monthly payment.
Lower Loan Amount:
Imagine you are considering taking out a $25,000 car loan for a new vehicle. You put $10,000 down. Say you agree to a 72-month term and have good credit. Your monthly payment will be around $250. If you only put $2,000 down, your monthly payment jumps closer to $400.
Consider that same $25,000 car loan with a 4-year term. One lender offers you a 3.00% APR and another offers a 2.00% APR. Taking the lower APR will save you $10.98 per month, or around $130 annually.
Longer Loan Term:
Let’s say you extend a $25,000 loan from 4 years to 5 years, based on the same 3.00% APR. This decreases your monthly payment by $104.14 but also sees you paying $391.85 more in interest charges during the loan duration.
Lower payment = higher cost?
Always keep the loan term and the amount of interest you pay in mind. While a longer loan term can decrease the monthly payment, you’ll wind up end up paying much more in interest over the long haul.
Suppose we consider that same $25,000 car loan at 3.00% APR and a 48-month term. Over 4 years of monthly payments, you will pay $1,561 in total interest on your loan. If you extend that same loan to 5 years, you’ll lower your monthly payment by $104. However, you’ll also increase the total interest you’ll pay from $1,561 to $1,953.
Some people may benefit by taking a longer loan term to reduce their monthly payments and use the difference to over higher-interest debt. Others will benefit more from choosing a higher monthly payment and paying off their car loan sooner.
Each situation is different, so you need to take time to make the best choice for your financial situation.
How to get the best auto loan rates with your lender
If you have shopped around and are still not getting the loan offers you would like, then here are a few ways you may be able to secure a lower interest rate.
- Make sure you meet the minimum credit score. Take some time and build your credit score before applying for a car loan. Paying your credit card bills and reducing your debt are two simple but effective ways to improve your credit score. A bad credit score can drastically increase your interest rate, just as a good credit score can reduce it.
- Shop around, apply for pre-qualification, and compare loan offers. To ensure you receive the best loan rates, apply to several lenders and compare offers before heading to the dealership. Don’t rely only on the dealership, where rates and fees can be higher for your car loan. Applying to get preapproved for a car loan gives you estimated interest rates and loan terms. Just be aware that a preapproval is not an actual guarantee that you’ll receive car loan rates on those terms.
- Refinance your car loan later on. If you can improve your credit score, later on, you could try to refinance your car loan to secure a lower interest rate.
Frequently Asked Questions
What bank is best to finance a car?
It largely depends on your financial situation and what type of auto loan you want to take out. Bank of America and Consumer Credit Union are both good for new car loans. On the other hand, if you’re looking for a used car, you might be better off with Chase or Cavana.
What is a good rate on a car loan?
The best auto loan rates for new cars for 2022 start around 2.47% APR, but not everyone is eligible for these rates. Depending on your credit score, a good average rate is between 3.51% APR and 6.07% APR.
Check with several different lenders and banks to see what is the best rate for you and your financial situation.
Is it better to get financed through a bank or dealership?
It depends on your financial situation and what type of auto loan you are looking for. Dealerships with in-house financing may offer lower interest rates than banks or credit unions if you have an excellent credit score.