Auto loans, demystified.
The dealer F&I office runs a profit center, not a service. Your best move is to walk in preapproved, with a check from your credit union or bank in hand. We show real APR ranges by credit tier, the new-versus-used trade-offs, and exactly when dealer financing actually wins.
Rate snapshot: new vs used
60-month term, credit union avgThe math on age matters more than the rate.
A 1-percentage-point lower rate on a new car is meaningless if the car loses $8,000 of value in 12 months.
New car
Lower APRs, longer warranty, manufacturer rebates. The catch: a new car loses 20% to 30% of its value in the first year. The Federal Reserve estimates the average new-car payment is now $740/month, an all-time high.
Used (1 to 3 years old)
Sweet spot for most buyers. The first owner absorbed the depreciation cliff. APRs run 1 to 2 percentage points higher than new, but the lower price more than offsets it. Certified pre-owned (CPO) programs add a manufacturer-backed warranty.
Used (4+ years old)
Lowest cash price, highest APR. Banks and credit unions typically cap loan terms at 60 months for vehicles 4+ years old. Mechanical risk rises sharply; budget 1% to 2% of purchase price annually for repairs.
Dealer, bank, credit union, or captive lender.
The cheapest financing is rarely the most convenient. Bring a preapproval as your floor.
Bank or credit union (preapproval)
Lowest typical APR. No add-on pressure. You walk into the dealer with a check in hand and shop on price, not payment.
You have to shop in advance. Some dealers will not honor a manufacturer rebate when you bring outside financing.
Best for most borrowers. The Federal Reserve consumer credit data consistently shows credit unions beat dealer financing by 1 to 2 percentage points at every credit tier.
Dealer (indirect) financing
One-stop convenience. Manufacturer-subsidized 0% or 1.9% APR offers are real (when you qualify) and beat any bank.
Dealer markup. Dealers can legally add up to 2 percentage points to a wholesale rate as compensation; you pay the markup over the life of the loan.
Use only if you qualify for a manufacturer special, or if your bank rate is competitive after dealer markup. Always bring a preapproval as your benchmark.
Captive lender (manufacturer finance arm)
Best APR on new cars when promotions are running. Loyalty discounts for repeat customers.
Promotional APRs typically require excellent credit and short terms (36 or 48 months). Less flexible on used vehicles.
Excellent for new-car shoppers with 720+ FICO who want a manufacturer special. Skip for used.
Buy-here-pay-here
Will approve almost anyone, regardless of credit.
APRs commonly hit 20% to 28%. Cars are typically older with hidden mechanical issues. The CFPB has issued multiple enforcement actions against this segment.
Avoid. If your credit is too low for a traditional auto loan, save longer or buy a cheaper car for cash.
Three things the F&I office hopes you forget.
Negotiate the price, not the payment
Dealers love to ask "what payment can you afford?" That question lets them stretch the term and add fees while keeping the monthly the same. Negotiate the out-the-door price first. Then talk financing as a separate conversation.
Decline add-ons by default
Extended warranties, paint protection, fabric protection, VIN etching, and dealer-installed alarms are profit centers. The CFPB has flagged several of these as commonly overpriced. If you want an extended warranty, buy it later from a third party for a fraction of the dealer price.
Read the contract before signing
The most common contract surprise is a longer term than agreed (e.g., 75 months vs 60). The second is a higher APR than promised. Both are easily caught with a 5-minute review. The dealer cannot legally change the contract after you sign and drive off, so review every line.
Common questions about auto loans.
Should I get preapproved before shopping for a car?
Yes, almost always. A preapproval from a bank or credit union does three things: it tells you your real rate, it caps your spending power, and it strips negotiating leverage from the dealer F&I (finance and insurance) office. The Federal Reserve consumer survey shows preapproved buyers pay 1 to 2 percentage points less than unprepared buyers at every credit tier.
How long should my auto loan be?
60 months is the sweet spot for most buyers. 72 and 84 month loans look attractive (lower payment) but cost thousands more in interest and put you underwater (owing more than the car is worth) for most of the loan. The CFPB warns that loans of 72+ months now make up 35% of new auto financing, a level that has historically preceded delinquency spikes.
What credit score do I need for a good auto loan rate?
720+ unlocks the best advertised rates. 660 to 719 (good credit) qualifies for competitive rates from banks and credit unions, typically 1 to 2 percentage points above the floor. 600 to 659 (fair) sees a sharper jump, and below 600 (subprime) faces APRs of 13% or higher. Every tier benefits from preapproval and credit-union shopping.
Can I refinance an auto loan I just took out?
Yes. There is no waiting period. Many borrowers take dealer financing at delivery (often at a marked-up rate) and refinance through a credit union within 30 to 60 days. The math works whenever the new APR is at least 1 percentage point lower and you have 24+ months remaining. See our auto refinance page for the full math.
Are 0% APR offers real?
Yes, but with caveats. Manufacturer 0% offers are real for excellent-credit buyers (720+) and typically apply only to new vehicles, short terms (36 or 48 months), and specific models. They almost always exclude rebates: you pick 0% APR or a $1,500 cash rebate, not both. Run the math; the rebate often beats the 0% offer once you finance the difference at 7%.
What is GAP insurance and do I need it?
GAP (guaranteed asset protection) insurance covers the difference between what you owe and what your car is worth if it is totaled. Useful if you put less than 20% down or take a 72+ month loan, because you will be underwater for years. Skip it if you put 20%+ down or take a 60-month or shorter loan. Buy GAP from your insurer or credit union, not the dealer; dealer GAP commonly costs 2 to 3 times more.
Walk into the dealership preapproved.
Run your numbers, then prequalify with a credit union before you shop.