How to finance a car without sky-high interest

When it comes to financing a new or used car, you have a lot of loan options in front of you – banks, credit unions, the auto manufacturers and personal-loan providers.

Which option is best will depend a lot on your credit rating. Consumer Reports advises that you check your credit standing before you start looking for a loan. This will give you an idea of the type of interest rate you likely will pay.

Higher credit ratings typically mean lower interest rates and lower monthly payments. Lenders offer lower rates to those they view as having less risk of not paying on the loan. Your options narrow considerably if you have poor credit, according to Investopedia. Interest rates go much higher.

If you know your credit score, a basic check at myautoloan.com will give you an idea of the interest rates related to your credit. There, you’ll see a credit score of 750 qualifies you for rates ranging from 3.2 percent to 4 percent. With a score of 550, the range can run as high as 27.99 percent.

You can also plug the interest rate or rates into an auto loan calculator to get a sense of the monthly payment.

Once you know your credit score and possible rates, you can then go shopping for a loan. Banks continue to be the most popular option. According to credit reporting firm Experian, banks are the most popular source of auto loans. The financing arms of the automakers come in second, while credit unions come in third.

Bank, credit union, automaker loans

Bankrate provides a list of bank and credit union interest rates. Credit unions typically have great service, but you have to be a member to get that service. Fortunately, credit unions have made becoming a member much easier, according to Bankrate.

What you will see on interest rates is that they are higher for used than new cars. GoBankingRatesshows that one of the biggest reasons for the difference involves the trickiness in appraising the value of used cars. Also, used car buyers tend to have lower credit ratings that buyers of new vehicles.

Financing through an automaker’s subsidiary, known as a captive financing company, can give you better rates than banks or credit units. Automakers want to sell you a new car so they make a lot of low-interest offers along with other incentives.

U.S. News & World Report maintains a monthly list of the deals automakers offer each month. You’ll see a lot of 0 percent and .9 percent financing. Understand that those rates, particularly the zero financing, are to get you in the door. According to Edmunds, few buyers qualify for that rate.

There’s no clear measure of what credit score qualifies you for that rate. Automakers have different guidelines.

Even if you do qualify, that actually may not be the best deal. Zero-interest financing tends to have shorter terms, 36 months compared to 60 months. That will make your monthly payment higher.

Some automakers have been offering zero-financing for 60 months and even 72 months on certain vehicles. But you have to want that particular vehicle.

As Edmunds notes, taking a cash rebate deal, which means you finance less, may have a lower monthly payment than zero-percent financing.

Personal loans for a car

You could also finance a private-party used car with a personal loan.

While there’s no collateral for a personal loan – as there is on typical auto loans — defaulting on an unsecured loan will have a major impact on your credit rating.

Still, what a personal loan gets you is the opportunity to approach a private party or walk into a dealership and tell them you are paying cash for the vehicle, whether you’re buying new or used. That also works with getting pre-qualified for a loan through a bank or credit union.

The benefit is helping you move through the buying process more quickly. But that’s the extent of the cash benefit. The myth that you get a better deal by offering cash is just that, a myth.

Chances are you won’t get a better price on the vehicle from a dealer. Dealers want to make money obviously, and they do that through financing and other products in the “finance & insurance” side of the dealership. Having cash upfront works better with private sellers, who may be much more willing to negotiate if you have the cash in hand.

The bottom line here is that you should do your homework on loans before venturing into a dealership to buy a new or used car. Weigh the financing options you have to determine what works best for you and your budget.