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How to get the right auto loan for you

Volvo XC90
(Image credit: Volvo)

Finding financing for a new car isn’t as complicated and tedious as it used to be, nor is it something that should be undertaken lightly. Finding the best auto loan for your car can actually be quite simple. You can walk into a dealer, grab the financing they offer you, and drive out – sometimes on the same day – but you may be signing up for a world of expensive pain and frustration. 

Your best bet is to shop around, look at different auto loan service providers and find out which loans are best suited to your budget, way of life and credit score. Many of these service providers can now give you a really good idea as to your interest rates and financial expectations without doing a hard pull on your credit which means there’s no reason why you shouldn’t get the best possible deal.

Costs and budgets

It may sound obvious and tedious, but you really do need to go into any car purchase with a very clear understanding of your budget and loan terms. Longer loan terms usually have lower monthly payment amounts, which is great if you don’t want to fork out a large lump of your monthly salary towards your car, but they also tend to have higher interest rates and cost you more. 

You will pay far more money to the service provider than if you opted for a short-term loan that has lower interest rates but higher monthly payments. If you have a good idea as to what your maximum monthly amount is, you can then make a more informed choice about the type of car you can afford and which service provider you’ll use.

Just remember, not all service providers are created equal and they will all come in at fairly different interest rates and loan terms dependent on their value-adds and systems. A high credit score will very likely get you some fantastic APR rates – some as low as 2.99% - and you can probably pick and choose your auto loan and your terms. A low credit score will affect the terms of your loan significantly and often it can mean that your interest rates can be as high as 14% on a new car. Our top provider for low-APR rates is LightStream Auto Loans, and our best for poor credit applicants is Wells Fargo Auto Loans.

If you do have a low credit score, don’t despair. The high interest rates may be daunting, but some companies do take your situation into account and offer fairly decent numbers and you can use this loan to build up your record which will help you in the future.

If you want to improve your credit score before you dive into your auto loan, or any other financial investment, then maybe look at it as a long-term plan. Pay off your bills and debts on time, use different types of credit, limit the number of credit cards you have and don’t close down healthy, paid-off accounts. There are even credit repair services, if you'd rather get a professional involved. If you spend some time focusing on building up your credit health, you can save lots of money when you finally aim for that auto loan.

Shop around and be prepared

It’s crucial that you spend time shopping around. No, it isn’t the ultimate in fun things to do, but it is going to be something you’ll thank your past self for when you’re paying off a car loan that’s low on interest and high on value. 

There are different companies that offer auto loans and each one is likely to have a different style or approach. Loans from established banks such as U.S. Bank are going to be wrapped up in legacy red tape, may take longer and will have fairly stringent requirements. While some, like Bank of America, are actually great for people who want a loan quickly. The advantage of using a bank, however, is its reputation, reach and security. You can also put all your financial eggs into one basket which makes admin far quicker and easier.

Credit unions - like Alliant Credit Union - are also an excellent option for auto loans although they may expect you to become a member before they will allow you to qualify. They often have great APR rates and efficient application processes that make the journey to membership worth the wait. Finally, you can opt into using either a dealer or a digital platform. 

The former may be more expensive and rigorous, even though it is convenient, but it can sometimes offer competitive rates on a par with the market. Digital platforms have become increasingly popular over the past few years but they can be risky. You will want to ensure that they’re accredited, trusted and have some form of reputation before you hand your credit and loan over to them.

When applying for your loan, you will also need to prepare some paperwork in advance. It’s tedious, of course it is, no paperwork was made by normal humans, but if you do the legwork now, you will be smiling later. The following items are essential when you start the process:

  • Proof of residence such as a utility bill, bank statement or credit card statement
  • Proof of income such as a bank statement
  • Proof of insurance that you can get from your insurer ahead of time
  • Proof of identity with a photo ID and a proof of residence bill
  • Documentation of your existing vehicle if you’re trading it in

Choosing the loan

When you’ve got in all your quotes from your different service providers it’s time to assess each company on the following criteria:

  • The interest rate – always check and see if you can get a better APR for your credit and vehicle
  • The terms of the loan – aim for as short a payment term as possible to reduce the overall cost of the vehicle
  • Prepayment penalties and hidden fees – always ask what fees you’ll be expected to pay throughout the process and on application, and make sure that you won’t be penalised for paying off your vehicle early
  • The total cost of the loan – this includes the interest, fees and any hidden extras. This is the full amount that you’ll be paying so make sure you understand what’s made the amount add up
  • Customer service and accessibility – if there’s a problem, you want to know that there’s a way of resolving it before it hits your credit score

If you take the time to find out more about your auto loan and how its costs, structure and service provider will affect you, then you will likely have a far more pleasant experience as you pay it off and manage your expenses. You may think that those few percentage points on your APR aren’t worth worrying about, but they do add up. It’s worth getting the right loan with the right company, especially when it’s very likely going to be part of your life for quite some time. 

Compare auto loans at LendingTree
LendingTree isn’t a lender, but a marketplace where you can invite auto loan lenders to come to you. It’s an opportunity to get the lowest interest rates available from small companies you might never have heard of that can lend you money in your area.
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