If you are looking to buy or refinance a car, you may be worried about the financing and how to get the best possible deal.
There are many car dealerships that are quick to offer you financing, but the terms might not necessarily be in your best interest. Another option for you is to seek out an auto financing company, but knowing where to start your research can be confusing.
Factors to consider include interest rates, credit requirements, loan terms and vehicle restrictions. Here’s a look at the difference between dealer and direct financing, what to consider when researching auto finance companies and our top picks of such companies for 2017.
Auto finance options
Direct lending is when you seek out and obtain auto financing through a bank, credit union or online financial institution. You work with them directly, and, if your loan is approved, you get the funds to purchase the vehicle of your choice.
- It takes financing out of the purchase price equation. Auto dealers profit from the amount you pay for the car. They have incentive to offer buyers financing with attractive low monthly payments, but this costs you more in the long run because the loan is stretched out over more years.
- Leverage in negotiations. When you get your own loan, you are a cash buyer in the eyes of the dealership, so you can name your price and have more power to negotiate.
- You can shop around. You can compare a variety of lenders and choose for yourself what the best deal for you is instead of placing it in the hands of someone else.
- The multitude of options can be overwhelming and make choosing a lender difficult. Researching companies takes time.
- You might miss out on incentives offered by dealerships.
Indirect lending occurs when you find a car with a dealer and have the dealership find the financing for you. It often has a network of lenders it works with to match borrowers with loans. Dealerships may retain the contract or hand it off to a third party.
- Convenience. You don’t have to shop around or do any pre-work, just walk onto the lot and the dealership gets you the financing.
- Special incentives. Dealerships want to move cars, so they often have incentives to help sweeten the deal such as a cash-back offer or introductory interest rate offers.
- Multiple options. With the dealership’s network of lenders, it can often offer multiple loan options and usually find a solution even when a borrower has bad credit, as it has a vested interest in you getting approved.
- Reduced negotiation power. When you need financing from the dealership, it has all the cards in its hand. It knows what you can afford and it is connecting you with their lenders.
- Trusting a biased party. Dealers do make their profits from vehicle sales and their commissions depend on how the financing plays out. This can unfortunately result in them negotiating your loan in their favor.
While indirect financing may be easier, doing your homework to find the best direct lender for your situation will probably get you a better deal. Because it can be a bit complicated, here are the factors to consider.
What to consider when looking at auto financing companies
Determine what loan types a lender provides. There are many options when it comes to vehicle finance, including new car loans, used car loans, refinancing options (in which loans on your current vehicle can be refinanced), and loans for people with varying credit from poor to excellent. Some companies advertise themselves as subprime auto finance companies and have loan products to match. By looking into the loan types, you can better identify which companies are the best fit for your situation.
Interest rates determine how much you pay for your car over the length of the loan contract. The interest amount is built into the contract and paid as part of your installments. Check each company’s rates for its various loan offerings.
A number of fees may apply to your loan. These can include origination fees, processing fees and prepayment fees. Ask about any and all applicable fees and factor them into the total cost of the loan.
Look at the minimum and maximum amounts that lenders provide, as many companies have restrictions in place.
The length of auto loans typically ranges from two to five years but can go up to seven. Remember the longer your loan, the more you pay because there is more interest. Companies offer different terms, so be sure to check what options are available.
Often overlooked, the application process is another important factor when choosing your loan. You should consider the ease of applying for the loan, how long processing takes and how long it takes to receive the money.
Restriction on cars
Lenders may have restrictions in place in terms of the types of vehicles they finance, so be sure to check for the details.
With a range of lenders, from subprime auto finance companies to those that lend at prime rates, check the credit requirements set by each company.
Now that you have the criteria, let’s look at our top picks.
Review and compare auto finance companies
Don’t walk into a dealership without doing your homework first. By shopping around for your own financing, you can negotiate the price of your car in your favor and know your rates and terms are competitive.
Lightstream, USAA, myAutoLoan and Capital One are good options; each works for certain applicants depending on their circumstances.
For example, if you have a good credit record and want more flexibility on the vehicle you choose, opt for Lightstream. If you have bad credit, then consider myAutoLoan or Capital One.
To learn more about these top auto finance companies and others, visit our auto loan review and compare page.