Comparing options for car loans
Fact checked by Suzanne KvilhaugReviewed by Andy SmithFact checked by Suzanne KvilhaugReviewed by Andy Smith
If you are looking for a loan to buy a new vehicle, you have several options. You can get a car loan from many lenders, but the most popular are banks and credit unions.
Auto loans from credit unions work in much the same way as a car loan from a bank. As a personal loan, you borrow money from the credit union and then pay it back with interest over a defined length of time. The main difference is that a loan from a credit union often has a lower interest rate than a loan from a bank—however, you’ll have to join the credit union to apply for one.
Learn more about the main differences between auto loans from credit unions and those from banks so you can decide which is right for you.
Key Takeaways
- With auto loans from banks and credit unions, you pay the institution back over a set term at a set interest rate.
- Banks and credit unions have credit standards, although the requirements for a loan from a credit union can be easier than from a bank.
- You’ll have to become a member of the credit union before you can apply for an auto loan.
- Car loans from credit unions generally have lower interest rates, longer and more flexible repayment terms, lower fees, and more personalized customer service.
Whether you apply with a bank or a credit union, the best auto loan rates vary from lender to lender. You can potentially save thousands by getting a lower rate, so take the time to shop around.
Getting a Car Loan Through a Credit Union or a Bank
Credit unions and banks both offer car loans that work similarly, but there can be significant differences between them.
Many of these differences stem from the more fundamental difference between a credit union and a bank. A credit union is a type of financial cooperative that provides traditional banking services like loans and mortgages. Some credit unions are small, but others have thousands of members and operate nationwide. Unlike banks, credit unions are owned and operated by their members and don’t operate for profit. This means that they can often offer lower interest rates than banks.
In many other respects, a car loan from a bank and a car loan from a credit union are quite similar.
Calculate Your Interest Rate
You can use Investopedia’s car loan calculator to calculate how much you’ll pay for your auto loan, whether it’s from a bank, a credit union, or another type of lender.
Car Loan Requirements
To get a car loan from a credit union or a bank, you’ll need to provide documents such as:
- Proof of identity: You will typically have to provide a photo ID with your signature.
- Proof of income: You can generally submit a pay stub as proof of income. Some lenders will also ask you about your monthly expenses.
- Credit history: A lender will check your credit to make sure you can repay the loan. For this, you’ll need to provide them with your Social Security number (SSN), address, and date of birth. Lenders will check your financial history, such as your debt and repayment history.
- Proof of residence: A driver’s license is normally sufficient to prove your residence. Some lenders will also ask you how long you’ve lived at your current address and whether you own your home.
- Trade-in information: You will need information about your current vehicle if you’re going to trade it in.
A key difference between car loans from credit unions and car loans from banks is that you need to be a member of a credit union to take a loan out.
The requirements for membership vary by credit union, and you may not qualify to join any credit union. However, many credit unions offer a quick, easy online application service.
Car Loan Features
Whether you get a car loan from a bank or a credit union, your loan will have similar basic features:
- Interest rate: Interest rates can vary. Some lenders charge 2.5% for short-term loans to borrowers with a good credit history, but interest rates can be as high as 25% for some loans.
- Loan term: A loan’s term is how long you have to repay the loan. This can also vary from one year up to eight years.
Before you sign any auto loan, read the contract carefully. You should also look for additional costs like the following, which could increase your borrowing costs:
- Hidden fees
- Vehicle add-ons
- Early payoff penalties
- Longer loan terms that could increase the overall cost
Note
You can get pre-approved for a car loan quickly—sometimes within minutes—whether you are applying through a bank or a credit union.
Credit Union Car Loans vs. Bank Car Loans
Getting a car loan through a credit union rather than a bank can have several advantages. These include:
- Lower interest rates: Interest rates on new-car loans from credit unions average more than 2% lower than bank rates.
- Fewer requirements: Once you are a member of a credit union, it can be easier to get a car loan than from a traditional bank, especially if you have a poor credit score.
- More flexible terms: Credit unions can be more flexible than banks when it comes to repayment terms and tend to charge lower fees.
- More personal service: Many customers value the personalized customer service that many credit unions offer. Because credit unions are generally smaller organizations than banks, they can often spend more time understanding your specific financial situation.
These advantages mean that car loans from credit unions are generally a better financial choice than a car loan from a bank (or a dealership). However, car loans from credit unions do have drawbacks to keep in mind—primarily, you must qualify to be a member and join the credit union.
The major disadvantage of an auto loan from a credit union is convenience. To apply for an auto loan from a credit union, you’ll have to be a member first. With some credit unions, you might even have to be a member for a number of months (or even years) before you can access the best rates on car loans.
If you want to buy a new vehicle soon, you might not have time to go through this process, and a bank loan may be your best option. However, it may be worth joining a credit union to access a loan with lower rates for your next vehicle.
What Are Three Differences Between a Bank and a Credit Union?
Since credit unions are member-driven and not-for-profit, members can often receive higher interest rates on savings, lower rates on loans, and lower fees. Credit unions typically have criteria for joining, can offer more customized services, and have better terms on their financial products.
Which Credit Score Do Banks Use for Auto Loans?
The credit score that banks use for auto loans depends on the bank and the type of loan. The three major credit bureaus are Equifax, Experian, and TransUnion. The two credit-scoring models used by auto lenders are FICO Auto Score and VantageScore. Banks may check either type of credit score before they approve your loan.
What Is a Good Interest Rate for a Car?
The average interest rate on a 60-month new-car loan was 6.36% from a credit union and 7.39% from a bank as of the second quarter (Q2) of 2024. The average interest rate on a 48-month used-car loan was 6.42% at a credit union and 7.69% at a bank as of the same quarter. An interest rate below these amounts can be considered good.
How Long Does It Take to Get Approved for a Car Loan from a Credit Union?
How long it will take to get approved for a car loan will depend on the credit union. Many credit unions offer quick application processes and will give you a decision on your loan within one business day. However, you’ll have to be a member of the credit union to apply for a loan.
The Bottom Line
Car loans from credit unions can be less convenient than car loans from banks because you will have to become a member of the credit union first and may have to wait before you can apply for a loan. However, credit union auto loans are generally more affordable than auto loans from banks. They tend to offer lower interest rates, longer and more flexible repayment terms, lower fees, and more personalized customer service.
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