Once upon a time, you had to visit a loan officer at a bank or other lender to ask for an auto loan. That was followed by a slew of paper forms that needed to be filled out by the prospective borrower and then evaluated by the bank’s loan staff. The process could take days, or even weeks, to complete.
Things are different now. Almost every financial institution has an online presence, and most offer information about car loans on their site. Most also provide an opportunity to apply for financing online, with a growing number able to take car buyers through the entire auto loan process without ever having to visit a bank or credit union branch.
In this guide, we'll look at the pros and cons of getting a car loan online, followed by the nuts and bolts of how to do so.
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Pros of Online Auto Loans
- You Can Often Get Better Rates
- The Internet Operates 24/7/365
- Approval Can Come Fast
- You Have Access to a Multitude of Lenders
- You Can Get Preapproved
- You Can Avoid Dealer-Arranged Financing
- Refinancing Online Is Easy
Cons of Online Auto Loans
- Customer Service Can Be Limited
- Often One-Size-Fits-All
- Brick-and-Mortar Locations Can Be Scarce
- You Still Need to Evaluate the Lender
- Getting a Loan Where You Already Bank Can Save You Money
Pros of Online Auto Loans
There are several advantages to getting a car loan from an online lender. They include:
You Can Often Get Better Rates
Because some online lenders don’t have expensive brick-and-mortar branches, they can offer lower new or used car loan interest rates. That’s not always the case, but it’s worth checking with virtual banks (lenders that don’t have physical branches) to see what kind of auto loan rates they can offer.
Competition for online business is fierce, so many lenders offer better rates through online banking than they do in their branches. Of course, you should look beyond auto loan rates to see the details on the length of the loan they’ll offer you, their loan amount limits, and any down payment you are required to make.
The Internet Operates 24/7/365
You may have heard the term “Banker’s Hours.” That once referred to the limited hours per day you could visit your bank. While many financial institutions have expanded their hours outside of traditional banker’s hours and even into weekends, they can’t compete with the round-the-clock access an online lender offers.
That’s especially convenient if you’re car shopping on the weekend and don’t want to have to rely on dealer-arranged financing. For many lenders, their online banking options include dedicated apps, which can be used for loan applications.
Approval Can Come Fast
Many online lenders use systems that can give you a loan approval in moments, instead of the days some brick-and-mortar lenders might take. That's a huge benefit when you need to make a decision about a car purchase on the spur of the moment or if you're shopping on the weekend.
You need to be a bit careful with the term “approval," however. Some lenders will give you a conditional approval that's not final until they have a chance to look more closely at the loan. Others will say you are prequalified for a loan, which means you still have to complete the full loan application process.
Even though the approval at an online lender may come quickly, you’ll still have to budget some time to completely and accurately fill out their loan application. Some online auto loan apps are more comprehensive than others and will take more time to complete.
You Have Access to a Multitude of Lenders
When you shop online, you’re not just limited to financial institutions in your neighborhood, or even your state. There are many lenders online that can make loans to buyers nationwide. By not limiting yourself to local lenders, you may be able to find a much better interest rate, more generous loan terms, or less expensive fees.
Some sites will automatically shop several lenders for you, allowing you to compare interest rates and receive multiple preapprovals using only one application.
You Can Get Preapproved
One of the best ways to save money when shopping for a pre-owned or new car is to have a preapproved financing deal in your pocket before you get anywhere near a car dealership. Using an online lender, you can have an auto loan preapproval ready to go when you start car shopping.
You typically want to get preapproved for a loan that is near the top of your car-buying budget. That way you don’t have to reapply to the lender if you find a vehicle that exceeds your preapproved maximum loan amount. Our car affordability calculator can help you determine your car-buying budget, and our article on how much you should spend on a car explores how to set your monthly payment.
Our article on why you should have preapproval discusses the process in greater detail.
You Can Avoid Dealer-Arranged Financing
When you have a preapproved financing deal in place, you can avoid dealer-arranged financing. Though a majority of car buyers do get their financing arranged by the dealership, not having a preapproval in your pocket increases the chances you’ll overpay for your car loan.
Selling cars is only one of the ways a dealership makes their money. They also make a tremendous amount of their income from the service department, selling add-ons to new and used car sales, and arranging auto loans for buyers. A dealership, in most cases, isn’t making the loan themselves. Instead, they’re acting as a broker for an outside lender and marking up the interest rate or fees the lender is offering. In most states, they don’t have to disclose how much they are adding to the cost of the auto loan.
When you have a preapproval, the dealer has to meet or beat the interest rate and loan terms if they want your financing business.
Refinancing Online Is Easy
There are many reasons you might want to refinance your auto loan, such as reducing the interest rate or getting lower monthly payments. Doing it online is easy, since many lenders offer online options to refinance. You just need the information about your current car loan on hand when you fill out the new credit application.
Take a look at our article on how to refinance a car loan to learn more.
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Cons of Online Auto Loans
While online auto loans have numerous benefits, with convenience and timeliness topping the list, they’re not perfect. Here are some things to watch out for with online lending.
Customer Service Can Be Limited
Some online lenders offer person-to-person contact through a chat window or email, but it’s not like the face-to-face service you get at brick-and-mortar lenders. Though you might be limited to business hours, having personal contact with a single person who can guide you through the process can be invaluable, especially if you’re a first-time borrower.
Limited customer service can also make car loans for buyers with lower credit scores more challenging. While an online auto lender can give you the best deal its automated systems can find based on your credit score, a personal representative can look beyond the scores to the circumstances behind the score. If a lender sees that a low credit score was caused by a specific event and is rapidly improving, for example, they may be able to make you a better loan deal.
Online lenders may be great if you only need a basic auto loan. However, if you need something that's out of the ordinary, such as a loan on a vehicle that's going to be used in part for business, it's probably better to talk to a lender in person. Even if you plan to use your car for a ride-hailing company, such as Uber or Lyft, or a ride-sharing company like Turo, you should probably talk directly to a lender, as some auto lenders will require you to have a business loan.
Brick-and-Mortar Locations Can Be Scarce
With many online lenders, nearly every part of the loan application process will be electronic. If signatures are required, though, your options to get them done quickly will be limited. Because some online lenders don’t have any branches at all, some documents may have to be sent by mail, which can slow down the loan process.
While many online lenders can wire funds directly to dealers, some will still want to send you a check. That’s especially true if it is a private party loan, rather than a purchase from a dealer. When you work with lenders that have brick-and-mortar locations, there’s a place to sign documents, retrieve checks, and safely meet to exchange money with private party sellers.
You Still Need to Evaluate the Lender
While many online lenders are well-known financial institutions, some are smaller lenders who might be located on the other side of the country. Some loan comparison sites may have unfamiliar names and reputations. Because you need to supply a copious amount of personal information when you apply for an auto loan, it is imperative to make sure the site is on the up and up before you input your personal data.
You can check with the local Better Business Bureau or other consumer advocacy organization where the lender is located to find out how many complaints there are about the lender. You can also simply Google their name with the word “complaint" to get a general sense of how consumers feel about the company.
Getting a Loan Where You Already Bank Can Save You Money
Don't overlook the bank or credit union that you already do business with. Though it might not be advertised online, many financial institutions offer discounts or other incentives to their existing customers. Some, for example, will offer discounted interest rates to those customers who have a checking account with direct deposit from an employer. Working with a bank or credit union where you already have an account makes it easy to set up automatic monthly payments, so you’ll never be late on your loan.
Of course, using your existing bank or credit union doesn't necessarily preclude you from getting an auto loan online. Most financial institutions have routes to getting car loans on their online banking sites and mobile banking applications. In some cases, you’ll find a better deal online than you would if you walked into a branch.
Not All Online Applications Get You an Approval
With some online sites, the approvals you receive after entering your personal information are not true loan approvals. Instead, the sites prequalify you to make a full application to another online lender. Prequalifications come from cursory checks of your credit and only suggest to lenders that you might be a good candidate for a loan. Often prequalifications are used for marketing purposes by lenders and dealers, attempting to draw you in to buy a new or used car.
If you have excellent credit, you probably receive many prequalifications in your email and snail mail boxes for auto loans and credit cards – without even requesting them.
A prequalification is not equal to a preapproval, as a preapproval requires a full credit check, plus an extensive credit application.
You Won’t Have Access to Car Deals From Automakers
If you choose to get an online auto loan, you’ll miss the chance to get a special new car deal with a below-market interest rate from an automaker. Low- or no-interest auto loans are used alongside cash rebates to encourage sales of specific new car models that aren’t selling quickly enough. Car deals are only offered at new car dealers and must be arranged by them.
Finding an Online Auto Loan
Discovering online auto loans is easy. You can go to each financial institution you’re considering one at a time, though you’ll end up spending more time (and, perhaps, more money in application fees) than you have to. Instead, consider using a multi-lender search site that will let you compare rates and get preapprovals from multiple lenders using one application.
Even if you use a multi-lender site, remember to take a swing by your existing financial institution's website to see if they can meet or beat the others offers you find. The idea of having your savings, checking, and loans at the same institution can have both convenience and cost-saving advantages.
If you are applying at multiple lenders, it is critical you make all of your applications in a short period. By filling them out within a couple of weeks of one another, the three major credit bureaus (Experian, TransUnion, and Equifax) will see all of the applications as just one transaction. If you stretch out the time between applications, your credit score will drop a few points after each inquiry.
Applying for an Online Auto Loan
Whether you are applying for a new car loan, pre-owned auto loan, or existing loan refinance, the process is pretty much the same. If you’re looking for a preapproval, you’ll want to have an idea of your maximum budget so you can get a preapproval at that amount. Our car affordability calculator can help you determine how expensive of a car to buy, and our guide to how much you should spend on a vehicle focuses buyers on the size of monthly payment fits their budget.
Buyers who have already found a car will need to provide the lender with its vehicle identification number (VIN), the price you agreed to pay, how much you intend to borrow, and where you found it. Be sure to let them know if you have a trade-in or are making a large down payment, as it can have an effect on the interest rate you have to pay. Assuming they approve your auto loan, they may be able to transfer the loan amount electronically to a dealership. Otherwise, they’ll cut a check to them.
The Application Process
Applying for an auto loan takes some preparation and patience. Be prepared to give the lender a ton of information about your employment, earnings, debts, and other obligations (such as rent and child support). Using that information, they’ll generate a couple of ratios that are crucial in their decision-making process. Looking at your existing obligations and the new debt you want to take on, they'll come up with a ratio of your debt to income. The higher the debt-to-income ratio is, the less likely the loan will be approved, and the higher the interest rate will be if it is. They may ask you to make a larger down payment to bring the ratio down.
The other important ratio is the amount of the loan you are asking for compared to the value of the car. With a new car purchase, it is the price you are paying. With a used car purchase, they'll look at the price you are paying or the car’s book value to determine the loan-to-value (LTV) ratio. Loans with LTVs 100 percent or above will likely see higher interest rates. Lenders may require additional down payment money to bring the LTV down before they approve the loan.
Another critical factor the lender will look at is your credit score (and perhaps the credit reports it was drawn from). Your credit score is a number between 300 and 850, with poor credit risks on the lower end of the scale and those with excellent credit at the high end. Buyers with poor credit can expect to pay much higher interest rates and accept shorter loan terms than those with excellent credit.
You can get an idea of the interest rates paid by different borrowers in our guide to current auto loan interest rates.
As tempting as it may be, it’s a horrible idea to exaggerate any numbers on your loan application or leave important information out. Doing so can lead to the loan being declined if the inaccurate information is found before the loan is approved. Once the loan is approved and funded, the lender can demand immediate repayment of the full amount if they discover it was fraudulently obtained.
If the bank or credit union approves the loan, ask them for a document that provides the loan terms, including the interest rate, loan amount, monthly payment, and the length of the loan. You can use that document at the dealership to see if they can meet or beat your financing offer. Auto loan rates can change daily, so a preapproved loan offer will typically only be valid for about 60 days.
Our guide to financing a car and getting a loan looks at the auto loan process in more depth.
More Shopping Tools From U.S. News & World Report
No matter where you are on your path to getting a new or used vehicle, the Autos team at U.S. News & World Report has resources to guide you. It all starts with finding the right vehicle. We feel you aren’t getting a good deal unless you’re getting a good car.
Using the consensus opinion of the nation’s top automotive journalists, blended with quantitative information about predicted reliability and safety, we rate nearly every vehicle you can buy, from subcompact hatchbacks to full-size pickups and SUVs. Our new car rankings show how different models compare to their segment rivals. Our used car rankings include information about cost of ownership to assist in finding cars that will be affordable for the long run.
When it comes time to buy, our new car deals and used car deals comprehensively list the best incentives currently offered by automakers. The U.S. News Best Price Program links both buyers and lease customers with local dealers offering pre-negotiated pricing. Buyers save an average of more than $3,000 when they use the program.