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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. 

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 financial institution 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 car 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 car purchase. 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) And Interest Rate

The annual percentage rate (APR) and interest rate represent the cost you pay to the finance company for borrowing its money. In car financing these are two different things. The interest rate is the cost of borrowing the money for the loan without fees. The APR includes fees, so it is slightly higher. Most reputable lenders will advertise the APR to account for interest and fees.

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 Credit Score Affects Financing A Car

Two people may take out the same loan for a new vehicle, but one could pay thousands more in the end than the other. Why? Because of their credit scores (and credit history, in general). 

Your credit score plays a huge role in how much a loan costs. If you have a higher score, you'll find lower interest rates. The opposite is true, with higher interest rates going to those with lower scores.

According to Experian's 2021 State of the Auto Finance Market, 62 percent of borrowers had credit scores of 601 or above, while just under 20 percent of borrowers had scores of 500 or below. Borrowers had scores throughout the whole range, but they found very different interest rates. 

Here's the average APR by credit score segment according to the study:

Credit Score Average New Car APR Average Used Car APR
781 to 850 2.34% 3.66 %
661 to 780 3.48% 5.49%
601 to 660 6.61% 10.49%
501 to 600 11.03% 17.11%
300 to 500 14.59% 20.58%

Total Amount Paid By APR

The table below shows how these average APRs affect the total you'd pay back on the loan. In this simple example, we use a starting loan value of $10,000 and apply each APR to it over a 60-month term. You can see how someone with a subprime score would pay significantly more than someone with a prime score. 

Loan Value And Terms Loan APR Total Paid
$10,000 over 60 months 2.34% $10,606
$10,000 over 60 months 3.48% $10,910
$10,000 over 60 months 6.61% $11,771
$10,000 over 60 months 11.03% $13,054
$10,000 over 60 months 14.59% $14,145

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.

Prequalification Is Your Best Friend

After you decide which main area to shop for your loan, try to find lenders that offer prequalifications. This means the lender does a soft check on your credit report and doesn't trigger a credit inquiry. 

Prequalifications are usually good for 30 to 45 days, which gives you time to shop around and compare different lenders. Most prequalifications are accurate, but in some cases, a lender may decline your application after pulling a full credit report.

A Preapproval Gives You Bargaining Power

There's an advantage to applying for a loan before you go to a dealership and choose your vehicle. You can get a preapproval from an online lender after you've done a full credit application and have been approved for a loan. A preapproval letter from a lender will show exactly what amount you're preapproved for. 

You can take this letter to a dealership when you go shopping. It can give you more buying power because the dealer knows you have financing up to that amount. The dealer won't have to bother with checking your credit. Since it's an easier process on them and they know you're serious, you have a bit more negotiating power as a buyer.

Avoid Buy Here, Pay Here Dealerships

When shopping for cars and financing, you may come across buy here, pay here (BHPH) dealerships. In contrast to standard dealers, which connect customers with separate lenders to fund the loan, BHPH dealers offer credit themselves.

This might seem like a good deal at first. You can choose a car and get financing from the same place, and many BHPH dealers work with low- or no-credit buyers. However, we recommend passing on these dealers. 

You can expect to pay the maximum allowable interest rate in your state if you use a buy here, pay here dealer. That's because these dealership don't work with many people who have good credit, and their pool of borrowers is more prone to late payments and defaults. This raises the rates for everyone who borrows from the dealer. 

Other Types Of Car Financing

So far, we've talked about financing a new or used car that you are purchasing for the first time. These are called purchase loans. There are other types of car financing in addition to these, including refinancing loans and lease buyouts. 

Car Refinance Loans

People use refinancing loans to pay off their current auto loan and get a better interest rate, payment amount, or payment structure. Refinancing your current loan could be a good idea if you have paid for a couple of years and are in a better place financially than when you started the loan. 

Many auto lenders offer both refinancing and purchase loans, but some specialize in refinancing entirely. The process for getting a refinance loan is similar to a purchase loan.

Lease Buyouts

Another type of car financing is a lease buyout. At the end of a car lease, you usually ahve the option to give it back or buy it. You can finance your lease buyout to pay off what you owe on the vehicle and set up a payment plan with a lender. Most dealerships accept lease buyout loans from reputable lenders.

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 Car Financing 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.

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.

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

Lowest APR: 0.99 percent

Minimum credit score: 610

Loan amount range: $5,000 to $100,000

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

Lowest APR: Varies by lender

Minimum credit score: No minimum

Loan amount range: Varies by lender

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.

Lowest APR: 2.49 percent

Minimum credit score: 575

Loan amount range: $5,000 and above 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.

FAQ: Financing A Car

How does financing a car work?

To finance a car, you can work with online lenders, banks, or dealerships. You'll fill out a credit application with information like your social security number and income. Then, the lender will let you know if you're approved and with what interest rate and loan terms. After you finalize the sale, you'll set up payments through your bank to pay the lender throughout the life of the loan.

When is financing a car a bad idea?

In general, we recommend avoiding financing a car if you have to use 72-month terms, if you only find loans from buy-here-pay-here dealers, or if you can't afford the payments. Also, if you have an interest rate of 10 percent or more, you'll be paying much more than the car is worth in the end. This can also make it harder to pay off your loan if you sell your vehicle.

Is financing a car worth it?

Financing a car is worth it if you can get a rate below four percent for a new car or seven percent for a used car. Paying the car off in three or four years instead of five or six years is also better in the long run. 

What is the best way to finance a car?

The best way to finance a car is to pay as much as you can with the down payment. Think 20 to 40 percent or more. This will lower your APR. You should also pay in 36 or 48 months to keep the lowest APR possible. 


Disclaimer: Our research team aims to keep this information accurate and up to date, but you'll get the most recent information from financial institutions. Rates and terms vary according to applicant and market conditions. We do not offer warranties for any loan products or services discussed on the site, and we recommend you read through a financial institution’s terms and conditions carefully when making a decision on a loan product.