How to Choose the Right Car Loan for You

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It's possible to get a car loan through several sources, including directly from a bank, credit union or dealership; indirectly through dealer-arranged financing; or from an online bank.

While plenty of financing options exist for car buyers, there are benefits and drawbacks to each. Here's what to know about where to get a car loan before you start the car-buying process.

Financing Through a Dealership

There are three types of financing you can get through a dealership: dealer-arranged financing, captive financing and "buy here, pay here" arrangements.

Dealer-Arranged Financing

Whether you're working with an independent dealer or a franchise dealership that primarily sells cars from only one manufacturer, you may be able to take advantage of dealer-arranged financing.

The process works by having the dealer shop around for you based on your credit situation. They'll get quotes from multiple lenders, which you can compare to find the best one. This process can be convenient and save you some time, but keep in mind that the interest rate you get this way may be slightly higher than what you'd be able to get on your own. That's because dealers may offer what's called a "buy rate," which includes compensation for handling the process.

Captive Financing

Many car manufacturers own captive financing companies that finance cars made by the parent firm. For example, if you're buying a new or certified pre-owned Toyota from a franchise dealer, you may be able to finance your purchase through Toyota Financial Services.

Captive financing companies can often provide special financing promotions, especially on new models. But they're typically restrictive on which makes and models you can choose, and you may not get the chance to compare the offer with other lenders.

Buy Here, Pay Here Financing

Buy here, pay here dealers specialize in working with people who have bad credit or no credit history at all and handle financing in-house rather than sending your contract to a lender.

This type of arrangement can make it easy to get approved if you're having a hard time getting financing elsewhere. But buy here, pay here dealerships tend to charge exorbitant fees and interest and often ask for a high down payment.

They may also lend you more than the vehicle is worth—something that's uncommon among other dealers—which could make your payments difficult to afford. As a result, repossessions are high with these dealers.

Getting a Car Loan From a Bank

One alternative to getting financing through the dealer is to work directly with a bank. This entails getting preapproved with the bank online, over the phone or in person before you head to the dealership.

Depending on the bank, you may need to provide details about the car you want to buy, which can be tough if you're not sure what you're looking for. Some banks, however, may just need your credit information and how much you want to borrow for the initial part of the process.

Once you're preapproved, you can take the offer to the dealership, then finalize the application and funding process once you've picked out your car and created the contract.

Getting a car loan from a bank could potentially save you money by giving you a lower interest rate than what you'd get through dealer-arranged financing. However, shopping around can take longer if you're trying to get quotes from several individual banks on your own.

Borrowing From Credit Unions

Getting a car loan through a credit union is similar to doing it through a bank. The main difference is that credit unions typically don't have the same online presence as big banks, so you may need to do the entire process in person or over the phone. You also typically need to be a member of the credit union to get a loan, which can make it difficult to shop around.

That said, credit unions often offer lower interest rates and fees than banks, and often provide more personalized service.

Buying a Car Through Online Lenders

Online lenders work similarly to banks and credit unions but provide a completely online application experience. You don't have to worry about driving to a local branch or, in some cases, even getting on the phone.

Some online marketplaces allow you to compare multiple online auto lenders in one place based on your credit score. This setup makes it easy to shop competitive interest rates and pick the option with the best terms.

The downside is that there are several unfamiliar online lenders out there, so you don't always know what kind of experience you're going to get. Also, interest rates can vary widely, depending on which lender you work with, so you may have to put in time and research to ensure you find a good fit.

How to Choose the Right Option for You

With so many financing options available, it can be tough to know which is the best one for your situation. As you compare your choices, think about all the features that are important to you, including interest rates, loan terms, vehicle restrictions and limitations, convenience, your credit history and more.

Getting a car loan with the right terms for you can take some time, but shopping around is an essential step in the process to ensure you avoid leaving money on the table.

As you do so, be sure to keep the number of hard inquiries on your credit report to a minimum. If you apply for multiple loans within a short period—typically 14 days but sometimes longer—they'll be combined into one when calculating your credit score and won't have a huge impact. But if you drag out the process, having more than one inquiry counted against you could negatively affect your credit scores.

Also, make sure you focus on the amount you're financing and not just the monthly payment. Lenders and dealers may offer longer repayment terms to make it easier to finance more affordably. But longer repayment terms may cost you more in interest, even if the monthly payment is less.

Make Sure Your Credit Is in Good Shape

Before you apply for a car loan, it's important to make sure your credit is in good shape. While it's possible to get a car loan with bad credit, you'll get more favorable terms if your score is higher.

Check your credit score and get a copy of your credit report from Experian or, then look for any problem areas you may need to address. If you're behind on payments with one or more accounts, try to get caught up as quickly as possible and pay on time going forward. If you have high credit card balances, work on paying them down.

Improving your credit can take time, and it's not always possible to boost your score quickly enough if you need to get into a new car now. But if you have time, it can make a big difference in the type of car you can qualify for and how much you ultimately pay to finance it.