The main places to borrow for a car
You can get a car loan from a bank, a credit union, an online lender, or a car dealership. Each source has different requirements, interest rates, and speed. Banks and credit unions typically offer lower rates if you have decent credit, but they take longer to approve you. Dealerships move faster and will work with lower credit scores, but their rates are usually higher. Online lenders fall somewhere in between — faster than banks, often willing to work with weaker credit, but rates vary widely.
The smartest move is to get pre-approved by a bank or credit union before you walk onto a dealership lot. That way you know your real borrowing power and interest rate, and you can compare it to what the dealer offers. If the dealer's rate is worse, you can decline and use your pre-approval instead.
Key Takeaways
- Banks and credit unions offer the lowest interest rates, but require a credit score of roughly 620 or higher and take one to three business days to approve.
- Dealership financing approves faster and works with lower credit scores, but charges higher interest rates because the dealer is taking on more risk.
- Getting pre-approved by a bank or credit union before shopping gives you a real offer to compare against the dealer's rate.
- Online lenders move quickly but charge widely varying rates depending on your credit and income, so you should compare multiple offers.
- Your credit score, down payment size, and loan term all affect the interest rate you receive, regardless of where you borrow.
Banks and credit unions: lower rates, longer wait
Traditional banks and credit unions are usually the cheapest source of car loan money. They typically offer interest rates one to three percentage points lower than dealerships, which saves you hundreds or thousands of dollars over the life of the loan. The catch is that they move slowly and have stricter credit requirements.
Most banks want a credit score of at least 620, though some prefer 650 or higher to offer their best rates. You will need to provide proof of income (a recent pay stub or tax return), a valid driver's license, and proof of insurance. The approval process takes one to three business days, sometimes longer if they need to verify your employment or income.
Credit unions often have slightly lower rates than banks and are sometimes more flexible with credit scores, but you have to be a member. Membership usually requires living or working in a specific area, belonging to a certain employer, or being related to a current member. If you are not already a member, joining can take a day or two, so factor that into your timeline.
Dealership financing: faster approval, higher cost
Car dealerships can approve you on the spot or within a few hours, which is why many people borrow through them. Dealers work with multiple lenders behind the scenes — captive lenders owned by the car manufacturer, banks, and finance companies — so they can often find someone willing to lend to you even if your credit is weak.
The tradeoff is cost. Dealership interest rates are typically two to five percentage points higher than what you would get from a bank. On a $25,000 loan over five years, the difference between a 5% rate and an 8% rate is roughly $3,800 in extra interest. Dealers also make money by marking up the rate — they may offer you a loan at 7% even though the lender approved you at 6%, and they keep the difference.
Dealership financing makes sense if your credit is too weak for a bank to approve, or if you need the car when ready and cannot wait for bank approval. It also makes sense if you are trading in a vehicle with negative equity (you owe more than it is worth), because the dealer can sometimes roll that into the new loan in ways a bank will not.
Online lenders: speed with variable rates
Online lenders sit between banks and dealerships in terms of speed and cost. Most can give you a rate quote in minutes and approve you within 24 hours. They are often willing to work with credit scores below 620, which banks typically will not do.
The problem is that online lender rates vary enormously depending on your credit score, income, debt-to-income ratio, and the size of your down payment. Two people explore on the same day might receive offers ranging from 6% to 15%. You have to explore to see your actual rate, and each process can temporarily lower your credit score by a few points.
If you decide to use an online lender, explore to three or four at once within a 14-day window. Credit scoring models treat multiple auto loan inquiries in a short timeframe as a single inquiry, so you will not take a bigger credit hit than if you applied to just one. Compare the rates you receive, then choose the lowest one.
What affects the interest rate you receive
No matter where you borrow, three things drive your interest rate: your credit score, your down payment, and your loan term. A higher credit score gets you a lower rate. A larger down payment (meaning you borrow less) also lowers your rate, because the lender is risking less money. A shorter loan term — say, three years instead of six — usually comes with a lower rate, though your monthly payment will be higher.
The age and mileage of the car matter too. Lenders charge more to finance a used car with high mileage than a new car, because used cars are worth less and depreciate faster. Some lenders will not finance cars older than a certain year or with more than a certain number of miles.
Your employment history and income stability also factor in. Lenders want to see that you have been at your current job for at least a few months, or that you have a job offer letter if you are new to your position. Self-employed borrowers often have to provide two years of tax returns to prove income.
Getting pre-approved before you shop
Pre-approval means a lender has reviewed your financial information and told you the maximum amount they will lend you and at what interest rate. It is not a may provide — the lender can still back out if your credit score drops or your employment changes before you close the loan — but it is a real offer you can take to a dealership.
To get pre-approved, contact a bank, credit union, or online lender and ask about their car loan pre-approval process. You will provide your income, employment, and credit information. Most lenders give you a pre-approval letter within one to three business days that you can print and bring to the dealership.
Pre-approval protects you in two ways. First, you know exactly how much you can afford to borrow before you fall in love with a car you cannot actually pay for. Second, you have a real interest rate to compare against the dealer's offer. If the dealer quotes you 8% and your bank pre-approved you at 5%, you can decline the dealer's financing and use your bank loan instead.
Comparing offers from multiple lenders
Before you commit to any lender, get offers from at least two or three sources. A bank, a credit union, and an online lender will give you a range of what is available. Write down the interest rate, the loan term, any fees (some lenders charge origination fees or prepayment penalties), and the monthly payment for each offer.
The lowest interest rate is not always the best deal if it comes with a high origination fee or a prepayment penalty that prevents you from paying off the loan early. Calculate the total amount you will pay over the life of the loan, not just the monthly payment. A slightly higher rate with no fees might cost you less overall than a lower rate with a $500 origination fee.
Once you have chosen a lender, let them know you are moving forward. Some pre-approvals expire after 30 days, so confirm the timeline. Then you can shop for the car itself, knowing your financing is locked in.
Frequently Asked Questions
Can I get a car loan with no credit history?
It is harder but possible. Credit unions and some online lenders will work with borrowers who have no credit score, though they may require a larger down payment or a co-signer. Dealerships are also an option because they work with multiple lenders and some specialize in first-time borrowers. Expect a higher interest rate than someone with established credit.
What if I have bad credit?
Online lenders and dealerships are your most realistic options. Banks and credit unions typically require a score of 620 or higher. A larger down payment (20% or more) and a shorter loan term can help you get approved and lower your rate. A co-signer with better credit can also improve your chances.
Should I finance through the dealership or bring my own loan?
Bring your own loan if your bank or credit union rate is lower than what the dealer offers. Dealers make money on financing, so they have an incentive to quote you a higher rate. If your pre-approved rate is better, use it. The dealership will accept an outside loan — they just prefer not to.
How long does it take to get approved for a car loan?
Banks and credit unions take one to three business days. Online lenders typically approve within 24 hours. Dealerships can approve you on the spot or within a few hours. Pre-approval is usually faster than final approval because the lender has not yet verified the specific car or confirmed your employment.
What documents do I need to get a car loan?
You will need a valid driver's license, proof of income (recent pay stub or tax return), proof of insurance, and proof of residence (utility bill or lease). If you are self-employed, most lenders want two years of tax returns. Some lenders may ask for bank statements to verify you have money for a down payment.