Auto Loans: The Ultimate Guide to Getting the Best Rates

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Car / Auto Loans

In the market to buy a new or used car and get the best auto loans rate? Perhaps you’re even considering refinancing your car loan?

Listen, finding the best car loan rates isn’t always easy. There are several factors at play, which ultimately determine your rates. Our ultimate guide to auto loans can help you understand which car loan is right for you and help you find the lowest auto loan rate possible.

Whether it’s a family car or a two-seater sports model, getting a car loan is one of the best ways to help you secure that dream drive easily.

Before you start comparing auto loan rates, be sure you have a complete understanding of how car financing works. The knowledge you’ll learn in this guide will help you choose a car loan that gets you up and driving fast AND saves you money in the long run!

What Are The Requirements For A Car Loan

Just like any other loan, several factors are taken into account before getting approved with a car loan. Your eligibility depends on the following documentation:

Proof Of Identity
When applying for a car loan, it is important to prepare all the necessary documents to prove your identity.

Some of the most common types of identity you can provide include an identification card with your signature, passport, birth certificate, and even utility bills. It is essential that all details in your proof of identity match to avoid any conflict.

Proof Of Income
To qualify for a car loan, you have to provide evidence that you have a stable source of income. Typically, borrowers can present pay stubs from the past few months or copies of recent tax returns. Bank statements and collateral, such as cars or other properties can also be used as proof of income.

Credit History Report
Lenders will also take a good look at your credit history. This is to ensure that you have the ability to pay off your debt on time. If you have a good credit score, your chances of getting approved will be relatively high. However, if previous loans negatively affect your credit history, chances are, you will be denied a car loan application. Be sure to maintain a good credit standing in order to qualify for the best auto loan rates. In the event you don’t have good or excellent credit, most lenders have options for bad credit car loans as well.

Proof Of Insurance
In some cases, proof of insurance is needed before you can take out a loan. While it’s not always necessary, it wouldn’t hurt to have insurance ready ahead of your purchase to increase your chances of getting approved. It will also give you plenty of time to search for offers that will suit your needs.

Types Of Car Financing Available

The main types of car financing you will find for personal use are:  variable rate car loans, fixed rate car loans, secured car loans, unsecured car loans and bad credit car loans.  Understanding the types of car financing will help you determine your financing needs (and hopefully save you money!)

Variable Rate Auto Loans

What is a variable rate car loan?  A variable rate car loan offers an interest rate that is dependent on the lender. It can fluctuate anytime during the duration of your loan, thus affecting the amount of your repayment.  When the interest rate changes, your monthly payment will go up.

Borrowers under this loan might find it hard to budget their payments, especially since it can change each month.

Typically, variable loans tend to have lower interest rates compared to other types of vehicle financing. This is partly because of the risks that come along with it, such as unstable interest rates. However, this type of loan can be beneficial for those who plan to settle their loan quickly.  Not many drivers will choose this option, mainly because you will need to be aggressive in paying the loan off quickly.  Therefore, if you don’t plan on paying your auto loan off in a short period of time, avoid this financing option and go with a fixed-rate auto loan.  Also, you’ll probably want to have a really good credit score.

Variable Rate Auto Loan Requirements

As with any loan, there are certain requirements you’ll need to meet in order to be eligible.

  • Proof of income
  • Proof of insurance
  • Proof of identity
  • Proof of residency
  • Trade-in documentation (if applicable)

While not a requirement, it’s best to have great credit and a healthy monthly budget if you choose this option.

Advantages of a Variable Rate Auto Loan

  • Gives you the advantage of a low interest rate, typically for the first year only in most cases
  • It’s a great option if you plan to pay the car loan off early

Disadvantages of a Variable Rate Auto Loan

While this type of financing does have it’s advantages, it also comes with a down-side. Here are the main disadvantages:

  • The interest rate can change during the life of the loan, based on the U.S prime interest rate
  • Without loan rate caps, you don’t know how much interest you’ll be charged over the long run
  • Without a good car loan calculator, it’s questionable how much you’ll pay in interest over the payment term
  • Since this is essentially an installment loan — and you plan to pay it off quickly — it will not give you much of a credit boost on your credit score.  With installment loans, lenders like to see positive payment history over an extended period of time.

Variable Rate Auto Loan Scenario #1

We’ve discovered that borrowers tend to understand financing terminology best when used in a scenario or example.  

John Smith is 42 years old and single.  He has a solid career, earns six-figures per year and has hardly any debt to his name.  He’s the type of guy that likes to pay his debts off quick. He considered leasing a vehicle, but fell in love with his dream car and wants to own it.  It’s a gently pre-owned Buick Enclave in pristine condition. He plans to pay 3-5x his monthly payment in hopes of paying the full balance of the loan off within one year.

How to Compare Variable Rate Auto Loans

When comparing variable rate auto loans, be sure to perform due diligence.  You can quickly compare rates from a few lenders below:

  • Ally Auto
  • Chase Auto
  • Local credit union
  • Wells Fargo
  • Capital One
  • USAA
  • US Bank
  • Etc

Fixed Rate Auto Loans

What is a fixed-rate auto loan?  As the name implies, a fixed car loan features a fixed interest rate during the entirety of the payment term. This means that the cost will not be affected by any fluctuations and will have a standardized monthly payment.  If you are looking for a loan rate that won’t change over the life of the loan, this is your best bet.

A fixed rate car loan makes it easier for a borrower to budget monthly payments, as the payment will remain the same throughout the life of the loan.

Fixed Rate Auto Loan Requirements

  • Proof of income
  • Proof of insurance
  • Proof of identity
  • Proof of residency
  • Trade-in documentation (if applicable)

Advantages of a Fixed Rate Auto Loan

There are several advantages to a fixed-rate car loan.  First and foremost, you’ll find advantages such as:

  • Fixed-rate car loans can have a positive impact on your credit score, once paid off and provided you have positive payment history
  • Interest rate remains the same throughout the life of the loan.  This helps you manage your money easier, knowing exactly how much your car payment will be every month

Disadvantages of a Fixed Rate Auto Loan

For the majority of consumers, you won’t find many disadvantages to a fixed-rate car loan. However, it depends on your financial situation and how soon you plan to pay the loan off.

How to Compare Fixed Rate Auto Loans

The majority of U.S banks and credit unions offer this type of car financing.  Compare auto loan rates with each bank and/or credit union to achieve the best rate for your financial situation.

Here are a few places you can start comparing loan rates:

  • Ally Auto
  • Chase Auto
  • Local credit union
  • Wells Fargo
  • Capital One
  • USAA
  • US Bank
  • Etc

Secured Auto Loans

Secured car loans is the type of car financing most people typically get when they finance a vehicle.  With a secure auto loan, the lender uses your collateral to offset their risk. Collateral can be anything of value, but is usually the vehicle you are financing.  Depending on the situation, some people use their home as collateral. If you choose a HELOC, for example, it’s possible you can claim this as tax deductible income.   It really all depends on your financial situation.

Secured Auto Loan Requirements

  • Proof of income
  • Proof of insurance
  • Proof of identity
  • Proof of residency
  • Trade-in documentation (if applicable)
  • Collateral used for the loan

Advantages of a Secured Auto Loan

There are a few advantages of having a secured auto loan.  Namely:

Looser Financing Terms

Because you’re putting up collateral, lenders typically are more flexible on financing terms.  There’s essentially less risk involved for the lender. This flexibility translates into saving you more money in in the long run.

Lower Income Requirements

A secured auto loan is a great option if you have lower income.  Here’s why. Since you’re putting collateral up, the lender has less risk and is more willing to proceed with an auto loan.  

Tax Deductible Income

In certain cases, you can deduct the interest paid from a secured auto loan on your taxes.  Typically, the income from a personal loan is not tax-deductible. However, if you choose to use your home as collateral (HELOC, line of credit, etc), the interest paid may be tax-deductible.  This is a general rule of thumb. Check with your accountant or tax specialist to confirm if this strategy will work in your situation.

Lower Interest Rates

Shopping for the best rates on an auto loan?  Secured auto loans typically have the lowest interest rates out there.  Why is that? Again, it’s because the lender has collateral to offset their loan risk.

Disadvantages of a Secured Auto Loan

  • If you fail to make payments, your collateral (home, etc) becomes vulnerable
  • If you select a longer loan period, the interest rate on your secured auto loan could inflate

Secured Rate Auto Loan Scenario #1

Angela is the Director of Communications for a PR firm.  She’s interested in financing a new Cadillac Escalade and does not want to put up any collateral, other than the vehicle she is financing.  She compares secured auto loan rates from the top lenders and banks and ultimately finds a rate that works best for her budget and situation.

How to Compare Secured Auto Loans

As you’ve learned, secured auto loans have it’s advantages as well as disadvantages.  When comparing this type of car loan, look for hidden or unexpected fees charged by the lender.  Upfront-costs, closing costs, etc. Shop around and find a lender that doesn’t charge any of this nonsense.  Here are a few places to start your comparisons:

  • Ally Auto
  • Chase Auto
  • Local credit union
  • Wells Fargo
  • Capital One
  • USAA
  • US Bank
  • Etc

Unsecured Car Loan

An unsecured car loan, on the other hand, does not require any form of collateral. However, you must be able to prove your capability of paying off the debt in a timely manner.

Borrowers with a good credit score can benefit from this type of loan. Typically, lenders check your credit history and other financial details, such as savings and previous loans. It is worth noting though that unsecured car loans tend to have higher interest rates but offer greater flexibility.

Unsecured Auto Loan Requirements

  • Proof of income
  • Proof of insurance
  • Proof of identity
  • Proof of residency
  • Trade-in documentation (if applicable)

Advantages of an Unsecured Auto Loan

  • Since you aren’t putting up collateral, the car is yours, free and clear
  • Full coverage auto insurance isn’t required, which could save you money every month
  • Your loan is not limited to the value of the vehicle

Disadvantages of an Unsecured Auto Loan

  • Unsecured auto loans are more difficult to get
  • Interest rates tend to be higher without collateral

Unsecured Auto Loan Scenario #1

Bob is a freelance editor for authors and digital publications online.  He is therefore, self-employed. He has a mortgage on his house and has been fairly religious in paying the mortgage down over the last few years, thereby freeing up quite a bit of home equity.  He wants flexible payment terms, the best interest rate and wants to deduct the interest paid from the loan on his taxes. Bob decides to finance his vehicle with an unsecured auto loan with a 36 month repayment term.

How to Compare Unsecured Auto Loans

  • Ally Auto
  • Chase Auto
  • Local credit union
  • Wells Fargo
  • Capital One
  • USAA
  • US Bank
  • Etc

How to Get a Bad Credit Car Loan

Shopping for a car loan with bad credit?  Don’t rule yourself out just yet.  There are several vehicle financing options available to people with bad credit.   Even though you may have poor credit, certain banks and lenders will still happily give you an auto loan.  

The reason is simple.  

The lender will most likely give you a secured auto loan — which means you’ll essentially put the financed vehicle up for collateral.  In the event you can’t pay your car loan, the lender can simply repossess your vehicle. This helps lenders mitigate their risk when financing people in bad credit situations.

Check your credit score

The first thing you’ll want to do is check your credit score.  You’ll want to know where you stand, financially. Don’t worry if your score is low.  Lenders will still work with you.

Save up for a down payment

Most lenders will want to see some form of a down payment.  The amount of a down payment needed depends on the type of vehicle you’re financing.  Most lenders like to see a downpayment of 5-10% on average. However, many lenders (and even dealerships) will take whatever you may have for a downpayment.  Again, it really depends on the type of vehicle (new, used, etc), the lender and/or car dealership.

Shop for secured auto loan rates

Because you have bad credit, most lenders will likely offer you a secured auto loan and use the vehicle for collateral.  Knowing this, you should compare secured auto loan rates from multiple banks and lenders.

Tips On Choosing The Best Car Loan

Regardless of your reason in buying a car — be it a growing family or just a mere urge to get behind the wheels — it’s best to take your time and consider all factors accordingly. Getting financial assistance for your dream ride can be quite beneficial, especially if done correctly. Here are some practical tips you can apply in choosing the right car loan.

How Much Can You Afford to Borrow?

Before applying for a car loan, it’s best to determine how much money you want to borrow. Once you know the amount of loan you need, be sure to stick with it at all cost. While it’s true that it could be tempting to accept higher offers from lenders, it is essential to consider it’s long-term consequences.

Going over your budget might put you in a more difficult situation. That being said, never overextend yourself financially and only borrow what you can pay. It is also worth noting that a car is a depreciating asset and could lose its value over time. So if you don’t want to end up owing more money than your car’s worth, be sure to stick with your budget.

Compare Auto Loan Rate Terms

Another factor you have to consider is the loan term. Depending on your needs and capability to pay, decide whether you want a short or long-term loan. Typically, a shorter loan tends to have higher monthly repayments. A longer loan, on the other hand, offers lower monthly repayments but with more interest.

As much as possible, go for a shorter loan. While it could be a bit challenging to pay the higher fees, the amount you can save from a higher interest rate on a longer loan is definitely worth it.

It is essential to know the interest rate and other charges that come with vehicle financing. If you feel like the interest rate is too much for you, look for other offers that fit your budget.


You should also take a closer look at your loan’s disclosure statement. This will help you determine any hidden and added charges, such as establishment fees, early repayment fees, missed payments fees, and annual fees.

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Auto Loans:  The Ultimate Guide to Getting the Best Rates