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When it comes to getting a car loan, you typically have two main choices: a bank (or credit union) or a dealership. While dealer financing has its perks, financing through a bank or credit union allows you to sidestep the dealer as a middleman and secure a loan before heading to the dealership.
One strategy for bank financing is to compare online auto loans, which may offer lower loan rates than traditional banks. Online auto loans can be a great option, but carefully weigh the pros and cons before proceeding.
What Is an Online Auto Loan?
As its name suggests, an online auto loan is one you can apply for on the internet using your computer or mobile device. These car loans often offer lower rates, faster approval times and the ability to complete the entire loan process—from application to funding—online without needing to visit a physical branch.
A major benefit of online auto loans is that you can use an online marketplace to compare offers from several lenders side by side based on your FICO® Score☉ , the credit score used by 90% of top lenders. Many online lenders also offer prequalification tools that show what rates and terms you may qualify for based on a soft credit check, which won't impact your credit score.
Learn more >> How to Get the Best Auto Loan
Pros of Online Auto Loans
Online auto loans can be a smart way to finance your car because of the many benefits they offer, such as:
Competitive Interest Rates
Without the expensive overhead that large national banks must contend with, online auto lenders tend to offer lower interest rates. And since the online lending marketplace is highly competitive, these lenders are incentivized to maintain lower interest rates to earn your business.
Quick and Convenient
If you need fast and easy financing, online auto loans check both boxes. You can apply from your laptop or any mobile device, and many lenders can prequalify your loan within minutes. That means you can discover the loan amount, interest rate and terms you might qualify for and compare against other offers to select the best car loan.
Of course, you'll still need to submit a complete application, provide supporting documentation and undergo a full credit check to receive formal approval. But you can complete the entire process online rather than by applying in person.
More Lenders Available
By considering online auto loans, you open your financing options to a wider selection of lenders. You're no longer limited to choosing between your existing bank, local financial institutions or dealer financing.
Shopping online opens doors to lenders nationwide and increases your odds of finding better rates, larger loan amounts and lower fees. You can even save time by using online marketplaces that let you submit one prequalification application and receive car loan offers from multiple lenders.
Can Leverage Prequalification
According to Experian's State of the Automotive Finance Market report for the second quarter of 2024, 60.56% of new car purchases are financed through the automobile manufacturer or dealership. This is called "captive" financing. However, most used car loans are financed through banks, credit unions and other lenders.
Dealer financing often offers competitive interest rates, but dealers typically act as a middleman for another lender and may mark up the interest rate at your expense. By getting preapproved with an online auto lender, however, you can significantly improve your chances of securing a better deal. The dealer will need to match or beat your offer to win your business, or you can simply go with the online lender's offer instead.
Cons of Online Auto Loans
Online car loans can offer competitive rates and the convenience of securing financing from your couch, but they also come with certain drawbacks you need to consider first.
Lesser-Known Lenders
When searching for a suitable car loan online, you'll find a wide variety of options, from well-known banks to lenders from different parts of the country that you may not have heard of. Before you submit sensitive personal information in your application, make sure to verify the legitimacy of the lender. Look for complaints and reviews from the Better Business Bureau (BBB), consumer advocacy groups or other sources to make sure they're reputable.
Few or No Physical Locations
Online auto lenders typically have limited or no physical locations. If you have any questions or issues arise during the application process, you likely won't be able to meet with a loan officer in person for assistance. Make sure your lender's customer service department offers sufficient support hours because you might not have a local branch to visit for immediate assistance.
Limited Ability to Negotiate
You may have the opportunity to negotiate a lower interest rate or more favorable terms when you meet with a loan specialist at a bank or credit union. However, since online lenders use digital systems and processes to streamline the applications, there's generally little room to negotiate for better terms.
Can't Get Special Promotions
Car manufacturers and dealers offer special promotions you can only qualify for if you finance through them. These may include low or 0% APR financing, cash rebates or clearance deals. With online auto loans, you may miss out on these exclusive offers.
How to Apply for an Online Auto Loan
Before applying for an online auto loan, prequalify with multiple lenders to compare rates and terms. Then follow these steps to qualify for the loan and purchase your new or used vehicle.
- Select a lender. After carefully reviewing several offers, select the loan that provides the best balance of favorable rates, terms and fees.
- Fill out an application. Complete the loan application by entering your personal, employment and financial details. Be prepared to answer dealer requests for additional documentation, such as personal identification and proof of residence and income. Many lenders now provide fast approvals within minutes, but some may take a few days.
- Review the loan terms. Once your car loan is approved, make sure the interest rate, repayment term and fees line up with what you were originally offered. Before signing, you may want to customize your loan. Talk to your lender about adding any special features you may want, such as gap insurance or a vehicle service contract to your loan.
- Sign the loan and receive funding. If you agree to the loan terms, you can sign the agreement electronically. Many lenders will send the funds directly to the dealer or provide you with a check to bring to the dealer or seller.
Learn more >> How to Get Approved for a Car Loan
Tips for Shopping for an Online Car Loan
Follow these tips to improve your odds of finding the best online car loan for your situation:
- Shop and compare. Like other types of loans, it's a good idea to get quotes from online auto lenders, credit unions and even your regular bank to get a range of offers. Review the loans to identify the ones with the most favorable terms that'll save you the most money.
- Pay attention to fees. Don't forget to include taxes in your loan calculations to help make sure you stay within your budget. Along the same line, be mindful of hidden fees that can drive up the price of your car. While some fees like title and registration fees are non-negotiable, others, such as charges for fabric or paint protection, may be negotiated down or removed.
- Follow your budget. Your car loan payments are your primary expense when purchasing a car, but they're not the only cost of ownership. As mentioned, taxes and fees can increase the overall cost. And don't forget to account for auto insurance premiums, regular maintenance and fuel in your budget to make sure you can cover all of the ongoing expenses.
- Get preapproved. Taking a preapproved loan offer with you to the dealership forces them to match or beat your offer if they want your business. It also puts you in a similar position as a cash buyer, so you can focus negotiations on the car's final price instead of its monthly payment amount—a common dealer negotiation strategy that can end up costing you more.
- Check the lender's funding process. If you're in a time pinch, you might verify how a lender funds the loan before signing for the loan. Many lenders will send funds directly to the dealer so you can purchase the car and drive off the lot. Others send a check directly to you, in which case it could take a few days before you could bring the check to the dealership.
Shore Up Your Credit Before Applying for an Online Car Loan
Whether you secure a loan from an online lender or a traditional bank or credit union, a strong credit profile could help you secure a lower rate and better terms. Depending on the size and term of your loan, you could save hundreds or even thousands of dollars over time by reducing your car loan rate by even 0.5% to 1%.
Before applying, check your Experian credit report and score for free to see where your credit stands. If necessary, address any issues or inaccuracies you find on your report and take steps to improve your credit.