How to Find and Get the Best Auto Loan

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Buying a car comes with a multitude of important decisions. In addition to finding a vehicle that meets your style and needs, you’ll also have to find an auto loan with terms that align with your financial situation. Loan terms can differ drastically between lenders and borrowers. Although creditworthiness and income are important factors when qualifying for auto loans with traditional lenders such as banks or credit unions, borrowers may find that qualifying for an unsecured personal loan may be slightly easier, especially for borrowers with excellent credit scores. AmONE created this guide to auto loans to help potential borrowers better understand how both auto and personal loans work so you can make more informed decisions when considering which type of loan works best for you.

How Does an Auto Loan Work?

Millions of people each year take out loans to buy cars and trucks. Here’s how the process of qualifying for an auto loan works, from prequalification to potential penalties for missed loan payments:

Getting Prequalified or Preapproved

Prequalification and preapproval involve a “soft” pull on your credit, but you’ll still have to complete a full credit application if you buy. Getting pre-qualified before you go car shopping lets you know how much you’ll be able to finance. Getting preapproved lets you know a lender will conditionally approve an auto loan.

Choosing a Car

Things can get a bit complicated when it comes to choosing a car because there are so many options for different vehicles and different places from which to buy. Private party sales can be more wallet-friendly, but you’ll have to arrange your own financing. Regional car dealerships typically have ample inventory in a variety of price options. Online car dealerships, meanwhile, will deliver a vehicle to your door. The key is matching the right vehicle with the right auto loan.

Getting Car Financing

There are several ways to finance the purchase of a vehicle. Creditworthy borrowers with very good and excellent credit scores can usually prequalify with a bank or credit union and enjoy lower interest rates than what’s being offered at auto dealerships. Dealerships specialize in arranging financing, though, and that may be the best option if you have good to fair credit and can’t prequalify with your bank. Dealerships also have preferred lending relationships for creditworthy borrowers, so there may be additional perks like cash discounts or zero interest by using dealer financing. Taking out a personal loan or financing through an online lender are additional options for auto loans.

Understanding Your Loan

When you take out a vehicle loan, you’re financing a bit more than just the automobile itself. Taxes are included in the loan, along with common dealership costs such as title, licensing, and destination fees. That’s why some cost-conscious buyers prefer private vehicle sales. You also can finance add-ons such as extended maintenance and vehicle warranties. Keep in mind that whatever you finance contributes to your overall car payment.

Making Your Car Payment

Your monthly payment of principal and interest is determined by the amount you finance, length of the loan, and its interest rate, or APR. A lower annual percentage rate means a lower car payment. You can make your payments in a variety of ways. Some lenders offer a small discount for setting up direct payments from your checking account. You’ll also avoid accidentally missing a payment if you have automatic payments initiated. You can set up your lender as a payee in online or mobile banking and make payments that way, or you can send in a paper check every month. Most lenders allow you to make payments over the phone as well.

What Happens If Your Payments Aren’t Made?

Defaulting on an auto loan can bring about dire consequences that will haunt you for years. Your car could be repossessed, which is extremely damaging to your credit because payment history is the single-largest factor in determining your credit score. It also can be hard to catch up if you fall behind on your payments, to say nothing of late payments. Speak to your lender if you’re having trouble making your payment. There may be a one-time payment skip or other type of forgiveness plan to help you get back on track.

Auto Loan vs Personal Loans: What’s the Difference?

If you have good credit, you’ll likely be able to finance the purchase of a car with either a personal loan or an auto loan. There are differences between the two financing options, though.

Unsecured vs. Secured

You probably can qualify for an unsecured personal loan if you have a solid credit history. Borrowers with good to excellent credit scores won’t have to put up any collateral to take out an unsecured loan with favorable terms. With an auto loan, however, the vehicle is used as collateral to secure the loan.

Spend However You Want

If you take out an auto loan, the funds are used to buy the vehicle. With a personal loan, you can spend the money however you choose, so you may want to consider borrowing a little extra to finance any upgrades or modifications you want to make to your vehicle.

Interest Rates

Interest rates for personal loans generally are higher than for auto loans, even for creditworthy borrowers. Personal loans are unsecured, so they carry much greater risk for lenders, who compensate for that risk through higher interest rates.

Loan Terms

Auto loans, especially for new vehicles, can be extended for longer terms with some lenders. The most common auto loan length is 72 months, followed by 84 months (seven years). Personal loans tend to have shorter loan terms, between 12 and 60 months. Longer loan terms typically mean lower monthly payments, but you’ll have more money going to interest over the length of the loan.

How to Choose Between an Auto Loan or a Personal Loan to Buy a Car

Both financing options share similar characteristics — each has a payment, interest rate and repayment period — but the numbers simply won’t be the same since personal loans and auto loans are different financial products. Review these important factors when looking into either type of loan.

What Type of Car Do You Want?

Be realistic in your desires. You may have the credit to finance a new $80,000 heavy duty pickup, but even if you put $20,000 cash down on the truck, you’ll be saddled with an $1,100 payment for five years at 4.5% interest. Buy within your means regardless of your available credit.

Where Are You Buying Your Car?

Vehicle buyers have more options than ever before when it comes to buying a car. You can shop at any number of online auto retailers, order a custom-built vehicle directly from a dealership or purchase one off the lot, or buy a used vehicle from a private party. The financing landscape will change with each type of purchase.

How Much Do You Need to Borrow?

You may be able to borrow more with a personal loan, while an auto loan is capped at the purchase price of the vehicle and its warranties.

How Long Do You Need to Pay Off Your Loan?

Auto loans generally have longer repayment periods — up to seven years with some lenders. Personal loans tend to have shorter repayment periods.

Which Lender Will You Use?

Traditional lenders such as banks and credit unions offer both types of financing options. Leverage your existing banking relationships to prequalify for either type of loan so you know how much and what type of vehicle meets your financial situation.

What Is Your Credit Score?

Personal loans are unsecured, so you probably won’t qualify for one unless you have sterling credit. Borrowers with poor credit may still qualify for personal loans, but the interest rates they are offered may not make good financial sense.

What Will Your Interest Rate Be?

In many instances, it may be advisable to use an auto loan to buy a vehicle. The average interest rate for unsecured personal loans can be as much as 44% higher than the average interest rate for auto loans.

Will You Pay Origination and Other Fees?

In many instances, borrowers won’t be charged origination or other common lending fees for taking out personal or auto loans. Fee structures vary by lender, though.

How Much Can You Afford Each Month?

Staying within your purchasing range as noted above will help ensure you can repay your personal or auto loan. Nothing is more important to continued financial stability than meeting your existing financial obligations.

What Are Your Current Monthly Payments, Income, and DTI?

Loan qualification criteria will vary between lenders, but many will look at your existing monthly payments and overall debt-to-income ratio, as well as your total monthly income. Auto lenders won’t dig as deep into these factors as personal loan lenders because their loans are secured by vehicles.

How Quickly Can Your Purchase Be Funded?

Dealerships have streamlined the process of buying a car and obtaining financing. You can complete the entire process in just a few hours and drive off the lot in a brand-new vehicle. It can take several days, or longer, to line up financing for an auto loan if you are purchasing a vehicle through a private party, and you’ll have to have good credit to qualify with a bank, credit union, or online lender. You may be able to qualify for a personal loan in as little as one day, however.

Why Would Someone Choose a Personal Loan Instead of an Auto Loan to Buy a Car?

If you have solid credit, you have options when it comes to financing major purchases. Here are three reasons why it may make more sense to take out a personal loan rather than an auto loan to purchase your next vehicle.

Unsecured Loan

Personal loans generally are unsecured. You won’t lose your vehicle to repossession if you default on the loan.

Down Payment

Some auto lenders may require you to put up a down payment. You won’t have that worry if you use a personal loan because you’ll get a lump sum that you can spend at your discretion.


With an auto loan, you can only finance the price of the vehicle and any extended warranties if purchasing through a dealership. With a personal loan, you can take out additional funds to purchase upgrades for your vehicle that complement your style, whether it’s new rims and tires or a ground-shaking stereo system and tinted windows.