Where is the Best Place to Get a Car Loan Online?
The best time to get your car loan is before you go to the dealership. Why? Because the worst place to learn about your car loan options is in the dealership’s back office—when you’re tired, hungry, and ready to sign anything so you can drive off in your new car. But that’s exactly where most car buyers get their loans now because it can be hard to figure out your options.
But you do have options, and the best thing you can do for yourself and your budget is to get your car loan online before you step foot into a dealership.
What are the benefits of getting a car loan online?
Why is it so important to get your car loan online and not from a dealer? Dealer markups. Car dealers now make more money from arranging financing than they do from selling cars. The average markup on a new car loan, including products typically sold with loans, is about $1,900. That’s an 80% increase since 2010! You can check the math and learn more by checking out the Outside Financial Markup Index. Most car buyers don't realize that dealers can mark up their loans, let alone by how much. That's why we track the average markup so you know how much you can expect to pay.
Securing your car loan before you go into the dealership also helps you to understand what you can afford to buy, based on your budget and your credit. The auto loan interest rates you will be offered depend on your credit history and score. The higher your credit score, the lower interest rates you should expect because lenders view lending you money as lower-risk.
Your credit score doesn’t just change the interest rate. It can mean the difference between being approved and being declined too.
Many lenders won’t lend money to anyone with a credit score below a certain number. You’re better off figuring out what kinds of loan you qualify for before you step foot in a dealership and fall in love with a vehicle that is out of reach.
Where can I get a car loan outside the dealership?
You have a few options for getting a car loan outside the dealership. Here are the pros and cons of each:
1. Your existing bank or credit union
If you like where you bank now, start there. (And if you don’t, maybe it’s time to switch!). Some banks and credit unions offer loyalty discounts if you’re already a customer or member, and many make the process easier because they already have all of your financial information. Check out your bank or credit union’s website to make sure they offer car loans. (Not all of them do.)
Pros of financing your car loan with your current bank or credit:
Potential for discounts
Ease of having all of your banking needs met at one place
Cons of financing your car loan with your current bank or credit:
The financial institution that offers the best savings account rate might not be the one that offers the best car loan rates
Being a customer or member does not guarantee the bank or credit union will offer you a car loan or give you a preferred rate (more about why it’s important to compare your options below)
2. A new-to-you credit union
By law, credit unions are non-profit member-owned cooperatives. That means they exist solely to serve their members, not shareholders. As a result, credit unions are able to offer car loan rates about 2% lower than those at banks or finance companies, on average.
Another big cost savings is that credit unions typically sell products like GAP and Vehicle Service Contracts at-cost or with a minimal markup (compared to hundreds or thousands at the dealership). So even if a car dealer can offer you the same or better interest rate as a credit union, you may still be able to save on your overall car purchase with credit union financing.
Every credit union sets different eligibility criteria: this can be based on where you live or work, or your affiliation with a group or organization. You can use this locator to find a credit union near you. Some employers also have relationships with credit unions, so if you’re unsure if your employer has a relationship with one, ask someone in your HR department or an employee benefits rep.
Some credit unions also allow you to become a member if you donate a small amount to a charitable organization. For example, Pentagon Federal Credit Union permits you to join if you make a donation and maintain $5 in a savings account. Digital Federal Credit Union is another similar option. Both offer easy online applications for car loans.
Pros of finding a car loan with a new credit union:
Overall cost savings (on the loan and related products)
Once you’re a member, you can enjoy the credit union’s other products and services
Cons of finding a car loan with a new credit union:
Some credit unions are more conservative in their lending and might not be willing to give you an offer if you have less-than-great credit
Not all credit unions offer online applications, and a few have applications that look like they were created 20 years ago
3. “Direct to indirect” financing
Some lenders and loan aggregators will provide you with a pre-qualified offer that only works if you use the loan at one of the dealers in their network. In the industry, that’s called “direct to indirect,” because ultimately you’re landing back in the dealer’s back office, with a dealer markup built into your loan. We won’t name names, but if your financing offer is limited for use to a few dealerships, that’s likely why.
Pros of “direct to indirect” car loan financing:
You know what you can afford before you go to a dealership, and can use the offer you receive to compare with other options
Cons of “direct to indirect” car loan financing:
You still wind up in the back office, paying undisclosed dealer markups on your loan and other products
Why is it important to comparison shop?
Even if you love your bank or credit union, it can be really helpful to compare your options. All lenders and all car loans are not the same. Lenders specialize in different loan types, for different types of borrowers. Interest rate offers can vary a great deal, even for the same borrower buying the same car. That’s especially true if you have less-than-perfect credit. Check around with different financial institutions to get the best deal for you. It can seem like a lot of work, but it’s worth it to get the best rate. The difference between the right loan and the wrong one can be worth thousands of dollars.
Final Words of Wisdom
Take your time. There's no reason that you need to "sign today"—that's a trick dealers use because they want to sell more cars and make more money. Cars are the second biggest purchase most of us make, but we often spend less time figuring out how to pay for them than we do clipping coupons before our weekly grocery shopping.
Start the car buying process with a budget based on your finances and credit profile, carefully consider all of your options, and use the many tools available online to evaluate what makes the most sense for you.
Not sure where to start? Outside Financial can help. We will guide you through the entire car buying process with our tools.