Car financing can be confusing, but choosing the right lender and offer will save you thousands in the long term.



Thinking about financing a car? Depending on your job and where you live, owning a car may be the easiest way to get around. But reliable vehicles can be expensive, which is where car financing comes in.

We’ve reviewed several of the best auto loan providers and researched everything you need to know about the car financing process. This article summarizes the most important information into an easy-to-understand guide to help you find your best auto financing options.

We’ll explain why you would finance a car, how car financing typically works, tips for finding the lowest interest rates, and recommend top lenders to get you started. Read on to learn everything you need to know about financing a car in 2021, and click below to start comparing rates from multiple lenders at


In this article:

Is Financing A Car A Good Idea?

If you have the cash to purchase a new car without a loan, take this approach. Unless your annual percentage rate (APR) is zero percent (which is rare), it is cheaper in the long run to purchase a car with cash. Of course, this is not practical or possible for many people. If you need a vehicle soon and don’t have the money saved up, financing may be the only way to purchase a car.

You should finance a car if:

  • You need a car and can’t afford to pay for the full value of the car in cash.
  • You want a car and can’t afford to pay the full value, but you can budget for the monthly expense of your payments.

You should not finance a car if:

  • You cannot afford monthly payments.
  • You can afford to pay for the full value of the car in cash.



How Does Car Financing Work?

Car financing is a type of loan. A lender will pay for a certain amount when you purchase the car, which you will be required to pay back, with interest, at a predetermined monthly rate. There are several important variables to any auto loan:

  • Purchase price
  • Fees
  • Down payment
  • APR
  • Financing term length

Purchase Price And Fees

The purchase price is the final agreed-upon cost of the car. Typically, the purchase price is set by a dealer but can be negotiated. On top of this price, you will also be required to pay taxes and other fees depending on the state and dealership. Taken together, these represent the total cost of the car.

Down Payment

Most auto loans do not pay for the entire cost of your vehicle. A typical down payment is 20 percent of the car’s total cost. The higher your down payment, the lower the amount you need to finance. The more you can pay as a down payment, the better, as you will be charged interest on the remaining amount.

Annual Percentage Rate (APR)

APR represents the amount of interest you will pay. In the United States, there is no standard for how APR must be calculated for auto loans. This means that depending on how often the interest is compounded, the same APR for the same loan amount can result in a different total interest paid. For this reason, it is difficult to compare offers between lenders based solely on advertised APR.

Luckily, many car financing offers will clearly state your monthly payment amount. If you multiply this number by the number of installments you will pay, you can determine the total price you will pay. If you subtract this total amount from the amount that you financed, you can figure out exactly how much you will pay in interest.

For example, imagine the total cost of the car you purchase is $20,000. You place a 20-percent down payment of $4,000. This means you take out an auto loan of $16,000 to pay the remainder. If your contract requires you to pay $250 per month for 4 years, you will end up paying a total of $20,000 to your lender. This is $4,000 more than the amount you financed – $16,000 – and represents your total financing fee (how much extra you had to pay in order to get a loan).

Beware of dealerships that advertise zero percent APR. Typically, when a dealer advertises this rate, it may give you no interest on your loan but tack on other fees that increase the total amount you must pay back. For example, rather than saying you must pay $16,000 plus 4 percent APR, the dealership will add a “service fee” on top of the sticker price so that the amount you must pay back is much higher, even though your debt does not accumulate interest.

If your loan contract does not clearly indicate the total amount you will need to pay back, do not sign it. Only agree to an auto loan you fully understand. If you have trouble understanding your loan terms, you aren’t alone. Many loans are intentionally confusing so that the customer has a more difficult time realizing if they are being scammed. Consider enlisting the help of a friend or even a loan professional to review your contract’s terms and conditions before signing.

Financing Term Length

Your financing term is the length of time it will take for you to pay off your auto loan, assuming that you meet all monthly payment obligations. The longer your finance term, the more you will ultimately pay. This is because the longer your loan remains unpaid, the longer you will accumulate interest. Try to pay off your loan as quickly as possible.



How To Get Car Financing

Along with deciding on a vehicle and determining your budget, you’ll need to choose where to get your auto loan from. There are several places to request car financing from, and each has its benefits and downsides:

Option For Financing A Car How It Works
Dealership financing Most dealerships offer vehicle financing, typically through third-party lending partners. This is the most convenient option, as you can compare multiple offers at the dealership and see if there are any special rates for certain vehicles. However, be aware that dealer loans may include high fees.
Bank financing While it may be more of a hassle to visit a separate location from where you will buy your car, local banks and credit unions can help work within your budget, won’t pressure you to buy, and will likely offer some of the best terms. Credit unions in particular are likely to be less predatory.
Online lender financing The easiest way to browse financing offers is online. Many online lenders partner with dealerships so that you can prequalify for a loan and shop for eligible vehicles on the same website. However, there are a lot of online auto lenders out there, so you’ll need to look for one that’s credible.



Tips For Financing A Car

When you are financing a car, there are several best practices to keep in mind to get the lowest rates:

  • Decide how much you can pay beforehand: Before even deciding which car to buy, determine how much you can afford to finance. Think about what monthly payment you can comfortably pay, and work backward from there. Cars depreciate in value, so you can quickly find yourself in debt if you take out a loan you can’t afford. After a few years, is not uncommon for the value of a car to be less than the amount you owe on your loan.
  • Check your credit score: Interest rates are largely based on your credit score. You are entitled to a free copy of your own credit report at least once a year. You can request this at and other websites. If you have a poor credit score, you might need a bad credit auto loan. One way to get a better APR if you have a low credit score is to have a cosigner with good credit.
  • Reduce finance charges: Your goal should be to lower the total amount you will pay on top of the cost of your vehicle. This means looking for a low APR and a short payment term. Also, try to reduce the amount you must finance by making as large a down payment as possible. Twenty percent is standard for a down payment, but if you can afford to pay more upfront, you will pay less later.
  • Compare offers: It’s a good idea to compare auto loan offers before you visit the dealership. When doing so, be sure to only request loan offers from lenders that offer pre-qualification that does not include a hard credit check. Hard credit checks lower your credit score, so do not agree to one unless you are ready to finalize a loan offer.



Recommended Lenders

When financing a car, it can be difficult to know which lenders are credible. To help you sift through the hundreds of choices available, we’ve narrowed down the best loan providers in the industry.

Read on to learn more about some of our top picks, or read our full review of the best auto loans for a longer list of recommended lenders. If you’re ready to start comparing loan offers right away, you can do so via


PenFed Credit Union: Lowest APR

PenFed Credit Union offers some of the lowest auto loan rates we have seen. However, it has stricter credit score requirements than other lenders and may not be an option for some. The company is well-regarded and has a positive reputation online.

PenFed Credit Union Pros PenFed Credit Union Cons
Offers exceptionally low interest rates Moderate customer service reputation
A+ rating from the Better Business Bureau (BBB) Does not offer loans to drivers with poor credit
  Customer reviews describe a slow application process

Auto Credit Express: Best For Bad Credit

Auto Credit Express is a good choice for those with bad credit. Even if you are undergoing bankruptcy or repossession, Auto Credit Express will work with you. Plus, Auto Credit Express will help you build your credit score if it is low.

Auto Credit Express Pros Auto Credit Express Cons
Offers financing for customers with bad or no credit Currently has a BBB alert regarding licensing issues
Pairs customers with loans based on credit profile Poor customer reviews
Offers special rates for military members  

To learn more about this provider, read our full Auto Credit Express review. is not a direct lender but a portal that connects lenders with customers. It’s a good way to browse loan offers and even find loans for private purchases. Pros Cons
Offers loans for drivers with bad credit history Not available in Alaska and Hawaii
Offers loans for private purchases Not available to drivers with credit scores below 575
Good customer service reputation and an A+ rating from the BBB  

To learn more, read our full review.



Alternatives To Financing A Car

If you need a vehicle but do not want to take out an auto financing loan, you have a few alternatives.

  • Lease: If you lease a car, you will pay a monthly fee that is likely to be lower than an auto loan payment. However, at the end of the lease term, you must return the vehicle and will be charged for excess damages. Some lease contracts have the option to buy the vehicle at the end of the lease.
  • Private loan: You might ask for a loan from an individual rather than a loan provider. An individual that you know may loan you money at a much better rate than auto lenders (or with no interest at all).
  • Cash payment: If you can avoid making a monthly car payment, it’s the best route to go. Cash payments are the cheapest way to purchase a vehicle in the long run, but most people do not have the funds to take advantage of this option.



Frequently Asked Questions

What happens if I miss a car payment?

If you think you are going to miss a car payment, contact your lender right away. You may be able to request an extension or have your contract terms changed. If you are able to negotiate any changes, be sure to get them in writing. If you miss too many car payments, your vehicle can be repossessed.

How long should you finance a car?

You should try to finance your car for as short a time as possible. A typical auto loan term is five to six years. Longer auto loans are not recommended because the value of your car may depreciate below the amount you have left in payments.

Can you finance any car?

Which cars you can finance depends on the lender. Many lenders will not provide auto loans unless you buy your car from a dealership, but this is not always the case. A lender will not provide a loan for an especially expensive car if the borrower has a poor credit score or low income. Likewise, if the value of the car is too low, a lender may not offer an auto loan and you’ll need to look into personal loan options.

Which bank is best for car financing?

There is not a single best bank for car financing, though we generally recommend Chase and Capital One – which are generally good banks for auto loans. Typically, a local bank or credit union is your best bet for auto financing.

What credit score do you need to get zero percent financing on a car?

Few lenders offer zero percent financing on auto loans. To be eligible for this interest rate, you would likely need a credit score above 720, as well as a stable income. Most of the time, if a dealership advertises zero percent APR, you will end up paying more in hidden fees.

Is a 72-month car loan bad?

While 72 months is long for a car loan, it’s not uncommon. If you can, try to sign up for an auto loan that does not exceed 60 months (5 years).

What car dealerships are offering zero percent financing?

Few car dealerships offer zero percent financing. Some dealerships advertise “0 percent APR,” but this is usually just a way to get people in the door and doesn’t always equal saving money on your purchase. Rather than charge an interest rate, the final contract may include additional fees that are not legally considered “finance charges.” This has been a common practice among U.S. automakers since the 1980s.