Car Loan Financing And How To Apply


Car loan financing is a specific type of lending designed to help drivers get the car they want and need. Knowing how and where to apply is an important part of obtaining the best financing terms for any type of loan.

The vast amount of nationwide car loan lenders on the market today makes it easy to compare the best available rates and terms, provided you first understand your credit status and budget requirements. 

Whether you are a first time borrower with limited credit or an experienced driver with a long, positive credit history, there is a car loan available for you. There is even car loan financing available for drivers with fair to bad credit. Read on for important information about car loan financing and how to apply today.                                                                                    

What Is a Car Loan?

When paying outright for the entire price of a new or used car is not possible, drivers turn to finance and money lending companies to apply for a car loan. Car loans are secured loans, and the collateral used to secure them is the title to the car being financed. Lenders hold the car title until the money borrowed to purchase it is paid back in full, plus applicable interest and fees. Car loans work like most other loans, having finance charges and loan repayment terms. Finance charges are assigned as Annual Percentage Rates (APRs), and the better your credit is, the lower the APR is on your loan. Loan repayment terms apply to the amount of time allotted to repay the loan in full. Longer terms equate to lower monthly payments. This is beneficial for short-term budgeting, but not necessarily saving money long-term. Longer payment terms almost unequivocally result in paying more interest in the end.

The Process of Applying for a Car Loan

The process of applying for a car loan begins with understanding your own credit rating and FICO score. FICO (Fair Isaac Corporation) generates a three-digit number based on all elements of your credit history. This number indicates to lenders the nature of your creditworthiness and helps them assess the risks to lending you money. The higher your FICO score the better your loan terms will generally be. Other factors affecting the nature of your loan terms include the ability to verify your monthly income over time, your employment history, disposable income and residential history.

Lenders apply a finance charge to borrowed money. This finance charge is known as an annual percentage rate (APR) and is added on to each payment you make. Payments, or installments, are made on a monthly basis and last one year to many years depending on your credit status, the amount of money borrowed and lender policies.

Use the Kelley Blue Book (KBB) to help assess the value of the car you want to purchase. The KBB is a trusted source for accuracy regarding fair prices on new and used cars. Invoicepricing.com is a newer service providing information about how much dealers actually pay for new cars on their lot. The next important priority is to assess your budget and know how much you can afford both in monthly payments (including interest) and long-term over the course of the entire loan. Finally, after comparison-shopping numerous lenders to find the best choice for you, use the information you have gathered to determine your preapproval status and potential APR with a soft credit check. A soft credit check does not damage your credit score when pulled, and is a valuable tool used by many car loan lenders to quickly assess the status of approvals and APRs.

Where Can You Apply for a Car Loan?

Applying for a car loan is easier today than ever before due to the online presence of a vast amount of well-known nationwide lenders. Applications submitted online frequently generate near instant approval and/or rate responses. Banks and credit unions still accept applications in-person. Another place where you can apply for a car loan is at dealerships for both new and used cars. Dealers have preferred finance companies with which they normally work. Some dealerships even offer car loans for drivers with fair to poor credit, albeit with much higher fees and finance charges.

Car Loans for Borrowers with Bad Credit

Having no, fair or bad credit affects your eligibility to receive a loan. There are lenders who offer car loans for borrowers with bad credit, however. For example, the Capital One Purchase loan has no minimum credit score requirements and a pre-qualification feature. The Lending Club accepts FICO scores as low as 510. If this type of situation applies to you, and if approved, expect to be charged a higher than average APR and less friendly repayment terms in exchange for what lenders all assess as a higher risk for lending you money.

Average Interest Rates for New & Used Car Loans

The average interest rates for both new and used car loans heading into the last month of 2020 ranged between four and five percent. Loans for new cars usually have lower interest rates and better repayment terms due to the reliability, longer warranty protections and less likelihood of a new car breaking down. As of December 2, 2020 the average interest rate on both sixty and forty-eight-month new car loans was 4.18 percent. The average APR on a thirty-six month used car loan was 4.56 percent for the same date.

Nationwide Car Loan Lenders

Determining the best car loan lender for you is partially dependent upon your credit rating and income history as described above. The lowest APRs listed might not be available to you. Lenders also all have their own policies, however and some offer lower APRs and better repayment terms than others for the same FICO scores. Doing thorough comparison-shopping without undergoing multiple hard credit checks is the key to getting the best rates and terms available. There are multiple nationwide car loan lenders offering various rates and terms. As always, some lenders rise above the others. The best nationwide car loan lenders on the market today are: