Complete Guide To Financing A Car (2022)

Financing a car lets you get a vehicle if you don’t have the money to purchase one outright or if you’d like to spread the cost out over time. Not everyone should opt for an auto loan, though, so we’ll explain when you might want to consider car financing options and when you might want to pay cash instead.

In this guide, we’ll take you through the car financing process. We’ve researched the top auto loan companies, so we’ll also recommend two that are the best for financing a car.

Car financing lets a consumer buy a vehicle with a loan rather than paying the full cost up front. If you need a car but don’t have the cash to cover the purchase, getting an auto loan might be your best move.

In certain instances, you should avoid financing a car. Consumers who can’t afford monthly payments on auto loans should avoid them since it’s unwise to take on debt you can’t pay off. Those who can afford to purchase vehicles outright should consider doing so, as they won’t have to pay interest or related fees on their cars.

You’ll often find financing a car to be the most practical way to get a vehicle, but it’s critical that you choose the correct lender. Not all loans and lenders are the same, so compare car financing options using an auto loan calculator before making your final choice.

Is It Better To Finance Or Pay For A Car?

In many cases, it’s better to pay for a car up front than to use an auto loan. Drivers who cover the complete cost of their vehicles at the start won’t have to pay interest on their purchases, making it cheaper over the long haul. It’s also cheaper to purchase a vehicle outright than to get a car loan and then refinance later on.

Financing a car is popular because it’s not always possible for motorists to cover the full cost of their vehicles immediately. Life without a car can be difficult in certain regions, so auto financing provides a workaround for those who need vehicles for their day-to-day lives.

Financing a car can be a better option than paying cash in these scenarios:

• The interest rates on your existing debt, such as credit cards, are higher than the auto loan rates you qualify for.
• The rates of return on your investments are higher than the auto loan rates you qualify for.

The process for financing a car is typically straightforward. Below, we’ll explain how to apply for auto financing in four steps and offer tips for finding the best rates.

1. Find Out Your Credit Score

Your credit score offers a glimpse into your creditworthiness, and lenders use it to determine the likelihood that you’ll repay an auto loan. Most lenders use the FICO credit scoring model and check your credit history through the three main credit reporting bureaus: Experian, Equifax, and TransUnion.

You may be able to find out what your FICO score is by asking your credit card issuer, bank, or credit union. Otherwise, you can pay to get your credit score from one of the credit bureaus. Checking your credit score is a soft inquiry, so it won’t negatively impact your credit.

Your credit score will have a significant impact on your interest rate when financing a car. The higher your score, the more likely you’ll be offered lower interest rates on auto loans.

2. Set A Budget

Before financing a car, determine how much money you can afford to spend per month and overall to pay an auto loan off. It can be easy to forget the purchase price of your dream vehicle during the car-buying process, but be realistic about your budget.

Your annual percentage rate (APR), the interest rate on your auto loan plus any fees, will determine how much you pay to finance your car. Your APR depends on factors including your credit history, your loan term, and the amount you borrow. While new vehicles usually cost more than used vehicles, they typically come with lower APRs.

3. Get Rates From Auto Lenders

Lenders may not offer the same APRs and loan terms when you’re financing a car, so compare rates from auto loan providers. There are plenty of vehicle financing options, from dealerships and banks to companies that specialize in auto loans.

Understand the differences between being prequalified and preapproved when financing a car. Prequalification offers an estimate of your rate, but because potential lenders only do a soft credit check, the rate could change after you apply for a loan. Preapproval comes after a hard credit check and almost guarantees financing at the terms outlined in the preapproval offer.

Preapproval can lead to a slight decrease in your credit score, but it allows a serious shopper to calculate the monthly car payments for the life of the loan. FICO counts all hard credit checks relating to your car loan as a single inquiry for up to 45 days, so rate shopping won’t impact your credit more than once.

4. Pick The Best Auto Lender For You

Everyone has different needs when it comes to financing a car. While some may avoid auto lenders with higher interest rates, others would be satisfied with any provider that’s willing to finance their vehicle.

When choosing an auto lender, keep the following factors in mind:

• APR: The lower the APR listed in your contract’s disclosures, the less you’ll pay to borrow money.
• Term length: Your loan term can vary considerably in length. Having a long-term loan typically means you’ll pay less per month but more over the full amount of time.
• Down payment: Making a significant down payment can save you money on interest when financing a car. The minimum down payment–if any–is determined by each auto lender. You may be able to use the trade-in value of your old vehicle toward the down payment on a new vehicle.

Your credit score is the most important factor that influences your rates for financing a car. That’s because auto lenders consider a higher credit score an indication that a borrower is more likely to repay a loan.

Below is data from Experian’s Q1 2022 State of the Automotive Finance Market report that shows just how critical your credit score is in determining the interest rate on your auto loan:

Those seeking out bad credit car loans can expect to pay rates of up to 20 percent when financing a car. Those with strong credit scores will likely receive relatively low auto loan rates.

Financing a car is a huge decision, so it’s important to pick an auto loan provider that’s both reputable and affordable. Four of the best car financing options are myAutoloan, PenFed Credit Union, Auto Credit Express, and LightStream.

Borrowers can count on these lenders to offer competitive starting APRs and dependable service. We’ll explain what makes each auto financing provider stand out in the section below.

Drivers can get connected with various auto lenders on the online marketplace myAutoloan. You won’t get a loan from myAutoloan itself, but the company can help you find auto financing with competitive loan payment options.

You’ll need a FICO credit score of at least 575 to qualify for services from myAutoloan, which is slightly higher than other providers’ minimum requirements. However, the company has an outstanding marketplace selection, and customer reviews give it an average rating 4.2 out of 5.0 stars on Trustpilot.

With low starting APRs, PenFed Credit Union is one of the industry’s most cost-effective options for financing a car. It also holds an excellent rating average of 4.6 out of 5.0 stars from customer reviews on Trustpilot.

Qualifying for PenFed Credit Union isn’t particularly easy if you don’t have good credit, as the company’s minimum credit score for auto loans is 610. While the credit union was geared toward military members in the past, anyone can join by donating to an approved nonprofit organization.

If you have a lackluster credit score, Auto Credit Express may be your best option. The company doesn’t have a minimum credit score for approval, which is uncommon among auto lenders. Keep in mind that borrowers do need an annual income of at least $18,000 to qualify for loans through Auto Credit Express.

Instead of offering its own loans for financing a car, Auto Credit Express connects drivers with the companies that best suit their needs. This process helps drivers with poor credit scores find vehicle financing with less strict credit requirements.

LightStream is a great auto financing option for those with good to excellent credit scores. It’s common for borrowers to pay low APRs through LightStream, and the online lender doesn’t charge late payment fees or prepayment penalties. 

Keep in mind that only those with superb credit will likely be eligible for auto loans through LightStream.

Our review process aims to deliver consistent and unbiased assessments of auto loan providers. While there are multiple qualities that make a loan company successful, our review team focuses on those we believe are the most important for consumers:

• Rates: Auto loan companies with high loan amounts and low APRs are more likely to meet customer needs.
• Reputation: Our review team explored ratings from experts and each lender’s number of years in business when giving this score.
• Availability: Companies that cover a variety of circumstances scored best in this category.
• Customer Experience: This rating is based on transparency and consumer satisfaction ratings. We also took into account the helpfulness of each loan provider’s team based on our shopper analysis.

*Data accurate at time of publication.