Where Should You Get Your Auto Loan?

There are numerous lenders available to choose from, and the state of your credit will determine which lenders you should look to for your auto financing needs.

Car dealer financing- Dealers offer financing typically through the finance subsidiary of the automaker. For example, a GM dealer will likely direct you to the General Motors Acceptance Corporation (GMAC) while a Ford dealer will likely suggest Ford Credit. The interest rates that are charged by these finance companies are normally higher than the interest rates that are offered at the local banks or credit unions. However, for many car buyers, this may be the only credit source they have available depending on their credit.

The reason why dealers push you to finance with their finance companies is because the dealers receive a commission for every car loan that they arrange. If car sales are slow and the auto manufacturer wants to stimulate buying, the automaker will sweeten their financing deals. In extreme cases, there is even 0% financing. This wasn't unusual during the recession after the 9/11 terrorist attacks.

Although it is hard to beat a 0% interest rate, remember that these deals can come with strings attached. You may have to pay a higher sales price for the car than if you financed the vehicle through another source. Plus, many of the low-interest rate loans at the dealers will apply only to cars on the dealer's lot; they may not include the cars that are ordered with special options from the factory. Make sure that you read the fine print to low interest rate auto loans.

Sometimes, getting your car loan directly through the dealer is your best deal. This is especially true if you are purchasing a new car and the dealer or manufacturer has arranged for low or zero percent auto financing on the make or model you are purchasing. But you should be aware that this low interest rate loan is generally only available to those with an excellent credit history. The only way to be sure is by comparison shopping.

Dealers make a lot of their money on financing. They have deals with lenders, often arranged so that the higher interest rate you pay, the more money the dealer makes. It's what they call their "back-end' business and it is highly profitable.

If you have a few bad marks on your credit report, you can usually still obtain dealer financing but it is typically at a much higher interest rate. They're in the business of selling cars, and if they can't get you financing, they're losing a sale.

Car dealerships know this and most dealerships work with a few sub-prime lenders in order to help car buyers with less than perfect credit obtain an auto loan. This means that even if your credit is less than ideal, you can get the financing you need for the vehicle you want, although it will usually be at a higher interest rate.

Buy here/pay here car lots- If there's one lender to avoid when you're trying to get the best auto loan rates possible, it's the "buy here/pay here" car lots. Unless you absolutely cannot get a car loan anywhere else, this type of financing should be avoided like the plague.

Find out what the maximum interest rate is that these dealers are allowed to charge by law, and chances are that's what their rates will be set at. When it comes to locking in the best auto loan rates, this type of financing isn't even a contender. It is not unusual to pay 18% interest for a car loan from one of these dealers. Over the life of the loan, this adds up to thousands in additional payments.

Bank financing- A bank is also a great source for auto financing as long as you have a good credit history. Banks typically have strict lending guidelines and rarely loan money to a borrower with bad credit. For those who already have a relationship with the bank, obtaining a car loan can be quite simple. In fact, some customers are so confident of the relationship, they will buy a car over the weekend with a check and then call the bank to arrange for financing to cover it on Monday. Of course, only the bank's best customers are able to do this.

Credit union- Credit unions only lend money to their members. In order to be a member of a credit union, you must pay a membership fee and belong to a certain group. For instance, many towns have a teacher's credit union where the only members are teachers and their families. Credit unions can offer great rates to their members for auto financing.

Paying cash for car. If you're lucky enough to be able to pay cash for a car, congratulations! But assuming you have excellent credit, you should check out low or no interest financing options before you empty your savings account. If your money is earning more in interest than the interest rate on your vehicle, it could be a smart option to finance the car rather than pay cash upfront.

Of course, many buyers would love to know that they are driving around in a car without the worry of making monthly payments. Be sure you can comfortably live without the cash if this is the option you choose.

Seller financing. If you are buying a used car from another person, there is always the possibility of seller financing. In this scenario, the person who you are buying the car from finances the car for you. Each month, you will make your payment to the seller. The interest rate on this type of deal will generally be much higher than other auto financing options available. There are also very few sellers who will be willing to finance the car for you. If you are lucky enough to find someone who is offering seller financing, be sure to get all of the terms in writing to avoid a sticky situation later.

Getting a loan online. The Internet has definitely changed the face of auto loan lending. With the abundance of online lenders, many car buyers are going no further than the comfort of their own homes to shop for auto financing. There are thousands of lenders available online. Because there is so much competition, the Internet generally offers the best car loan rates around. There are also lenders out there for every type of borrower. Online lending is not limited to those with excellent credit. Be sure to shop several websites and compare based on all of the terms of the loan, not just the rate.

Family and friends loan. Some people are able to turn to their friends or family for loans. Many times these loans carry a minimal interest rate and can be a great car financing option. Be sure that all of the terms are laid out in writing and you are prompt in making your payments. If there is a possibility the loan will cause hard feelings down the road, your best option may be to seek a car loan elsewhere. It is better to pay a little more interest and save your relationship! Perhaps the biggest disadvantage is that this type of loan will not help you to establish credit.

Take out a home loan. If you own your home, you have an additional auto financing option available to you. You can refinance your existing mortgage for more than you owe and get the cash you need to buy the car or you can take out a home equity loan. Either of these options usually offers competitive rates because of being secured by real estate. In most cases, the interest paid for the car loan will also be tax deductible if you itemize. The downside to this auto financing option is if you cannot make the payments for your car, you will also now risk losing your house as well.

As you can see, there are a variety of car financing options. The best option for you depends on your individual situation. Be sure to fully research your options to ensure you get the best deal available! Insurance Companies. Many if not all of the big name insurance companies also offer financial services including car loans.

These agencies will very often loan money to their policyholders. Many auto insurance companies provide attractive interest rates on car loans. Most life insurance companies also provide a single payment loan on the cash value of your policy--this can be used to pay for your car or at least the down payment. You can then repay the loan as part of your regular premium payments for the life insurance policy.