In 2020, the average new car purchase hovered at around $39,000. In 2022, that number jumped to $48,000 – an 81% increase in just two years. As a result, auto financing and car loans are more important than ever for prospective buyers. If you’re looking for a new ride, understanding how to get a car loan – and what you can do with it after – can help you land the car you want at a price you can afford.
What Is Auto Financing?
Financing a car involves borrowing a car loan from a lender, which you then use to pay off the vehicle. You’ll pay the lender via interest and fees put on the loan. Potential lenders include:
- Banks,
- Credit unions,
- Online lenders,
- Finance companies, and
- Dealers.
At Carvana, we offer financing to prospective buyers. We also allow buyers to finance their cars through most U.S.-based banks and credit unions.* By pre-qualifying for a Carvana auto loan, you can get personalized terms for our inventory without impacting your credit score.
How Do I Get a Car Loan?
To get a car loan, you need to apply with a lender. The quality of your application can dictate the interest rate and fees associated with your loan.
If you want to get a car loan, you should:
- Check your credit score. Once every 12 months, you can request a free credit report from Equifax, Experian, or TransUnion on AnnualCreditReport.com. Having a subprime credit score (600 or lower) won’t necessarily make you ineligible for a loan, but it can negatively impact interest rates and fees.
- Determine what lender(s) you want. Most dealers offer their own loans, but you may also want to get a quote from another lender like your bank or credit union.
- See about pre-qualifying with the lender(s) you like most. Pre-qualification usually only requires a “soft” credit pull, so it won’t hurt your credit score. It’s a great way to estimate loan terms more accurately.
- Think about getting preapproved. Preapproval involves a “hard” credit pull, which will temporarily lower your credit score – but sometimes, it’s more accurate than a prequalification estimate.
- Set your budget. After getting prequalification/preapproval, you should know roughly how much your car loan could cost. Start thinking about how much you want to spend, and make sure you set aside an extra 10-15% for sales taxes and fees.
- Find cars that fit your budget. You’ll also want to check if your desired lender(s) have any terms or conditions (time limits, excluded brands, etc.) that you need to contend with.
- Finalize your loan. When all’s said and done, it’s time to compare loan offers from your lenders and choose the one that best fits your finances.
It’s worth noting that multiple “hard” credit pulls at once will only be considered as one inquiry. If you know multiple lenders will need to make hard pulls, try and line them up so you don’t lower your credit more than necessary.
At Carvana, we wanted to make auto loans easier. Completing a short, two-minute form allows you to receive personalized, competitive rates across our inventory that are valid for 45 days – all without impacting your credit score. Have bad credit? No worries – if you’re over 18, make at least $4k a year, and have no active bankruptcies, you can still finance a purchase through Carvana.
What Interest Rate Can I Expect from a Car Loan?
Car loan terms are generally non-negotiable and calculated using your credit history, individual income, and the price of the vehicle you wish to buy. That means your terms may vary depending on the car you want.
According to Experian’s 2022 State of the Automotive Finance Market report, the average auto loan interest rate is 4.07% for new cars and 8.62% for used cars. However, the quality of your application could impact your terms significantly. For example, buyers with a “superprime” credit score (781-850) had an average interest rate of 2.40% for new cars and 3.71% for used cars.
How Long Should a Car Loan Be?
The average car loan is 72 months (six years) for both used and new vehicles. However, many experts advise buyers to take out shorter loans. For example, a sub-five-year (60-month) loan generally gets buyers better interest rates but requires higher monthly payments.
The longer your loan, the more you’ll end up paying in interest and fees over time. There’s no hard rule for how long or short a car loan “should” be. A shorter loan is better if you want to minimize how much you lose to the loan itself. On the other hand, a longer loan may make your dream car more affordable in the short term.
Can I Sell a Car After Financing It?
Yes. However, you’ll need to pay off the remainder of the loan before transferring the title. Determining whether you have positive or negative equity in your car can help you make a smart sale.
First, check how much your car is worth using something like the Kelley Blue Book. We’ll also tell you how much Carvana would pay for your car in around two minutes.
Once you know the estimated market value of your car, ask your lender for the “payoff” value – i.e., how much you need to pay to fully own the car. If your car is worth more than the payoff, you probably have positive equity and stand to make some money on a private sale. If the car is worth less than the payoff, you probably have negative equity and could lose money.
Selling your car to a dealer – especially as part of another car purchase – is another process entirely. Like a private buyer, the dealer will probably pay you for your old car if you have positive equity. However, if you have negative equity, they may add the negative equity amount onto a new car loan – resulting in a more expensive loan for your new ride.
Can I Refinance A Car Loan?
Yes, you can refinance your car loan at any time if you have a lender that approves the new loan terms.
If you consistently make your monthly payments and build a better credit score than when you took out your car loan, refinancing can help you get better terms. You can also use refinancing to extend the length of your car loan if you’re having trouble making monthly payments, although you may end up paying more in the long run.
Hopefully, this blog has helped you understand the ins and outs of car financing. Stay tuned for more tips and tricks!
*Currently, we do not work with the following Banks and Credit Unions:
- Road Loans (Citibank and Santander)
- A+ Federal Credit Union
- Metabank
- Carfinance.com/Car Finance Capital
- Ally Bank
- Wells Fargo
- Chrysler Capital
- Ford Motor Credit
- Honda Financial
- Exeter Finance Corp
