When comparing car loan options, it’s important to consider various factors such as interest rates, loan terms, fees, credit requirements, and lender reputation. Let’s compare the different types of lenders you mentioned: banks, credit unions, OEMs (Original Equipment Manufacturers) captive finance companies, and auto finance companies. We’ll also discuss the credit ratings each entity is likely to accept.
With Banks and Credit Unions you can get pre-approved and shop like a cash buyer as nearly any new or used car dealership. OEM and captive finance are offered from the dealership F & I office. OEM finance companies’ approvals are only honored at one of their franchises, whereas an approval from an auto finance company is only honored at a dealership that has a relationship with the auto finance company.
Banks
Banks offer car loans as part of their lending services. They typically have strict credit requirements and may offer competitive interest rates to borrowers with good credit. Banks often accept a wide range of credit ratings, from excellent to fair. However, those with poor credit may face challenges in obtaining approval or may receive loans with higher interest rates.
Credit Unions
Credit unions are nonprofit financial institutions that are owned by their members. They often offer more favorable interest rates and terms compared to banks. Credit unions tend to be more flexible with credit ratings, and they may be willing to work with borrowers who have fair or average credit. Some credit unions specialize in serving members with lower credit scores.
OEMs Captive Finance Companies
OEMs captive finance companies are affiliated with specific car manufacturers. They provide financing options directly to customers purchasing their vehicles. These companies often offer competitive rates and incentives to promote their brand’s vehicles. They generally accept a broad range of credit ratings, including excellent to fair, to encourage more people to finance their cars through their captive finance arm.
Auto Finance Companies
Offered through the dealership F & I office auto finance companies specialize in providing loans specifically for purchasing vehicles. They may cater to a wider range of credit ratings, including car buyers with bad credit. Auto finance companies often charge higher interest rates compared to banks or credit unions due to the increased risk associated with lending to individuals with lower credit scores.
Credit Ratings
Each lender has its own criteria for evaluating creditworthiness. The specific credit rating that lenders are likely to accept can vary, but here’s a general idea:
- Banks: Typically accept borrowers with average to excellent credit ratings with credit scores above 660. Those with poor credit, bad credit or no credit may face more difficulties or higher interest rates.
- Credit Unions: Some credit unions are more lenient and willing to work with borrowers who have fair or average credit. They often provide options for borrowers with credit scores above 600.
- OEMs Captive Finance Companies: They generally accept a broad range of credit ratings to promote their brand’s vehicles and encourage financing through their captive finance arm. For new cars OEM captive finance companies often vary their credit requirements based on need to move specific inventory. Additionally, captive finance companies occasionally offer the lowest interest rates, such as 0% auto financing. Lastly, some of the OEMs tie in additional rebates or bonus cash with their financing.
- Auto Finance Companies: These companies specialize in working with individuals who have less-than-perfect credit ratings, including borrowers with credit scores below 500. Auto Finance Companies can also help people build credit with a car loan.
Wrapping It Up
These are general observations, and individual lenders may have specific requirements and policies that can differ from the norm. It’s advisable to research and compare offers from multiple lenders to find the best car loan that suits your specific needs and credit situation.
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