Car Financing: Options, Rates, and Impact of Down Payments

How to Finance a Car

Car financing is available from many sources, including national banks, local banks, credit unions, online lenders and even the automakers themselves. Putting money down or trading in an older vehicle can help you qualify for better loan terms by lowering your loan-to-value ratio.

You can also find great deals by shopping for used cars. Plugging loan terms, interest rates and monthly payments into a car payment calculator will help you figure out how much to borrow.

Interest rates

The car loan you get for a new or used vehicle can affect its overall cost. That’s because interest rates aren’t static — they rise and fall based on market conditions. When rates rise, they typically drive up monthly car loan payments. Increasingly expensive loans can make vehicles less affordable, which impacts demand and sales.

Several factors can impact your auto loan rates, including the size of your down payment and your credit score. You can find online calculators that show how different rates affect your total loan cost. If you have poor credit, a co-signer with a better score can help you qualify for lower rates.

The type of car you choose can also impact your interest rate. For example, lenders generally charge higher rates on used cars because they see them as a greater risk due to their depreciated value. New cars, on the other hand, are seen as a safer investment by lenders.

Down payments

A down payment is a sum of money that reduces the amount financed when buying a new or used car. It’s usually required by lenders and can help buyers improve their chances of qualifying for financing when their credit scores are less than ideal.

The larger a down payment is, the lower the loan amount and monthly payments will be. A down payment also signals to lenders that borrowers are less likely to walk away from their auto loans, reducing the risk of default.

To save for a down payment, create a budget and stick to it. Reduce spending and consider using automation tools to pull a portion of each paycheck into a savings account. But don’t drain your emergency funds or you could find yourself paying more in interest charges down the road. Aim for 20% or more of the purchase price as a minimum.


The lender you choose has a huge impact on your finance car experience. They decide if you are eligible for a loan and what the terms should be. They also influence the annual percentage rate (APR) and how much you will pay over the term of the loan.

The credit scores and debt amounts you have are also important to lenders. A low debt-to-income ratio and a high credit score will help you qualify for the lowest auto-loan interest rates.

If you have bad credit, there are second-chance lenders who specialize in helping people with poor credit get financing. However, these lenders may charge higher interest rates than other lenders.

You can also shop around for auto loans before you buy a car. Getting preapproved for auto financing will give you an idea of the rates you are eligible for and can help you negotiate with dealers. Some lenders will perform a hard inquiry on your credit to determine your eligibility. A single hard inquiry usually only impacts your credit score a few points, but you must make all inquiries within a short window of time.


Automakers have historically supplied a significant share of car financing, particularly through captive finance companies such as General Motors Acceptance Corp. These companies have historically financed their loans by tapping into short-term credit markets, and thus have been sensitive to volatility in these markets. Consequently, county-level market shares of auto financing have considerable spatial variation, suggesting that the financial crisis had different impacts on financing availability in different parts of the country. MarketWatch Guides Team.

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