How to Get a Car Loan

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Applying for a car loan is easy. All you need to do is submit a loan application with the requested documentation to the lender and wait for a loan decision. But securing an auto loan with a competitive interest rate is another story.

woman in new car

You’ll need to do a little legwork and possibly get your financial ducks in a row. It may take a bit of time to get it all done, but your wallet will thank you.

Keep reading for a step-by-step guide to securing the optimal car loan for you:

Step 1: Review Your Credit Report

When lenders evaluate your auto loan application, they are concerned with two primary factors: your credit scores and your ability to repay the auto loan.

They want to make sure you have the means to make timely monthly payments. And part of making that call is by looking at your credit history and credit score to gauge how you’ve handled other debt obligations thus far.

Lenders look at your credit scores to determine your interest rate and whether they will give you a loan at all. For this reason, you want to make sure your credit report doesn’t have any negative, inaccurate information that can hurt your credit scores.

Grab a free copy of your credit reports from each of the three major credit bureaus. You should also check your credit scores. Many banks and credit card issuers also offer free credit scores.

Dispute Inaccuracies

If you spot errors on your credit report, file a dispute right away. The credit bureau has 30 days to reach out to the creditor and communicate the results to you.

If you want to get the ball rolling a little faster, you can always reach out to the creditor directly and try to resolve the issue. You can find detailed guidance on how to file a dispute here.

Step 2: Run the Numbers

What type of car are you planning to buy? First, note the purchase price (taxes and registration included) and search online for average interest rates or annual percentage rates (APR). Next, use an online auto loan calculator to determine how much the car will cost you every month and over time.

When doing the calculations, try inputting different loan amounts, interest rates, and loan terms. Keep doing this until you decide on a monthly car payment that seems comfortable.

You may find that the car you wanted is out of reach, and you need to look for cheaper vehicles. While you may not like it, it will save you the disappointment of being denied an auto loan because the purchase price is beyond your means.

Quick note: refrain from focusing too much on the monthly payment. Instead, pay attention to what you’ll be paying in interest and how much the auto loan will cost you over time.

Step 3: Analyze Your Spending Plan

Determining how much you want to spend each month is a must. But it would be best if you took it a step further by seeing how a new car loan would fit into your monthly budget or spending plan. To do so:

  • Add the monthly loan amount to your current list of expenses.
  • Take a look at your disposable income. Will it be drastically reduced?
  • Evaluate how your financial goals will be affected. If a car loan means spending several years paying down debt or not saving much after living expenses are covered, consider a vehicle with a lower monthly payment.
  • Don’t forget to add in the cost of maintenance, repairs, insurance, and gasoline. It doesn’t make sense to buy a car when you can afford to maintain it or put gas in it. Some vehicles are far pricier to maintain than others, come with higher insurance premiums, or burn gas like they’re going out of style.
  • Ax unnecessary expenses from your budget to free up room for the car loan payment.
  • Consider a down payment. Some lenders may require one. You may also get a better interest rate and loan term if you have a down payment.

Step 4: Research Lenders

When searching for auto loans, you’ll quickly discover there are three primary types of auto loan lenders to choose from. You can apply at a traditional bank or credit union, or with an online lender.

Applying Online

Applying online is a quick and easy way to find auto loans. Many online lenders offer flexible terms and competitive rates regardless of your credit background.

It’s important to shop around and compare rates, terms, and reviews of multiple lenders before making a decision. Additionally, make sure to read any fine print carefully to make sure you know all the details of the loan before signing.

Credit Unions

A credit union can be a great option to get a car loan as they generally pride themselves on customer relationships. And since they are non-profit, member-owned entities, they don’t have a commercial ax to grind. For this reason, you may have more luck and, in some cases, secure a lower interest rate.

woman standing next to car

Banks

There are major banks, like Bank of America and Wells Fargo, and there are community banks that are local operations. Both offer new and used car loans to consumers, both online and in-person.

But you may find that the barriers to qualification are a bit more stringent with major banks. They get scores of loan applications, use technology to screen applicants, and will issue a rejection without thinking twice.

On the other hand, local banks tend to value customer relationships more. So, you may be able to plead your case and get approved for an auto loan even if your application is initially rejected.

Captive Finance Companies

Captive finance companies, which are owned by automakers, provide traditional car loans, as well as special financing deals. This could include 0% interest offers, or other rates significantly lower than those offered by other lenders.

Captive dealer financing offers are often used to boost car sales when they are not meeting the automaker’s expectations. By taking advantage of these incentives, you could end up saving a lot of money over the life of the loan.

Buy Here, Pay Here Dealerships

Buy Here, Pay Here dealerships are auto dealers that provide financing directly to buyers. They may be an option for car buyers with bad credit. However, these car dealerships should typically be avoided due to their high interest rates and aggressive repossession practices.

It’s best to look for other financing options that may have more reasonable terms and conditions. Taking the time to do some research and compare rates may help you find a better deal.

A Word of Caution

There are plenty of shady subprime lenders that prey on consumers with tarnished credit history. Unfortunately, they often find success with this group of consumers because many feel their credit is too poor to get an auto loan elsewhere.

But this is not always the case, as some lenders may be willing to approve your application. So, explore those options before settling for a loan with a higher interest rate from a buy here, pay lender.

If you’re unsure of where to start, take a look at these lenders that offer auto financing to individuals with poor credit.

Step 5: Get Pre-Approved

Now that you’ve decided on a lender, it’s time to shop around for the best loan offer on the market.

Rate Shopping

The good news is you have 45 days to get approved without dinging your credit score, thanks to myFICO. Why so? All credit inquiries will count as one entry on your credit report if you choose a loan within this window. So, this means you scope out several options before settling.

Consider checking an online lender’s website to see if they have a pre-qualification tool that lets you enter your information and see loan options and interest rates.

What You’ll Need

To obtain a pre-approval, the lender will more than likely request the following information:

  • Proof of income
  • Proof of residence
  • Proof of insurance
  • Other financial statements, like profit and loss ledgers (if self-employed) or bank statements
  • Credit references (in requested)

Failure to provide this documentation could result in the delayed processing of your application. Or the prospective lender may choose to reject it altogether.

Step 6: Find Your Ride

At last, the best part of the process: car shopping! Finding the car of your dreams shouldn’t be too painful. But you want to use resources, like Kelley Blue Book, to ensure you’re getting a good deal on the vehicle.

Furthermore, take a peek at the CARFAX Report to confirm the car has a clean track record and legitimate title. Otherwise, you may run into issues with the lenders when it’s time to close on the loan.

Are you buying a car from a car dealership? Be sure to bring the auto loan offers you’ve received to see if they can beat the best one. The sales representative and financing department want to earn your business, so chances are they will do as much as they can to make it happen.

Bottom Line

By taking these steps, you should be able to secure the most competitive loan available to you without spending a fortune on interest. If you cannot find a car loan that meets your needs, reconsider your options. Work on improving your credit rating so you’ll qualify in the future.

If you have no choice but to accept a subprime loan because you’re in a dire situation, commit to working on your credit score. You can refinance the loan once 6 to 12 months have passed, and you can qualify for a better rate.

How to Get a Car Loan FAQs

How easy is it to get a car loan?

Getting a car loan can be relatively straightforward, particularly if you have a good credit score. To apply for a loan, lenders typically request the following information: proof of identity (such as your name, address, and Social Security number) and evidence of your ability to repay the loan. Those with a good credit score are more likely to have their loan approved.

How do I qualify for a car loan?

To qualify for a car loan, you will need to have a steady source of income, a good credit rating, and a valid driver’s license. You may also need to provide proof of insurance, residency and identification.

What is the loan term for an auto loan?

Loan terms for an auto loan can range from 24 to 84 months. The longer the term, the lower the monthly payments, but the higher the total amount of interest you’ll pay.

What credit score do you need for a car loan?

The exact credit score required to qualify for a car loan will vary depending on the lender. Typically, you need a credit score of 620 or higher to qualify for a car loan. However, some lenders may have lower credit score requirements. Other lenders may require a higher score or other factors to qualify for financing.

How much car can I afford if I make $3,000 a month?

It is suggested that you not spend more than 10% of your take-home pay on a car loan payment each month. For example, if your post-tax income is $3,000, then you could afford to make a payment of $300.

How much car can I afford if I make $4,000 a month?

When taking home $4,000 per month, it’s recommended to keep the car payment at about $400. However, it is not advised to opt for a long loan term to reduce the monthly payment, unless absolutely necessary.

Can I get a car with a 500 credit score?

A 500 credit score is consider bad credit. There are many auto lenders that specialize in bad credit auto loans. However, your interest rate will likely be high and you may need to make a large down payment. Additionally, you may be limited to used car loan options from subprime lenders.

Learn More About Car Loans

  • How to Finance a Car – Considering financing a car? This guide will provide you with a comprehensive overview of the steps involved and all the information you need to know about the process.
  • What Is the Average Car Loan Interest Rate? – Interest rates can drastically change how much you’ll be paying each month on your car loan. Before you commit to a loan, make sure you understand what interest rates you’ll be paying and how that will affect your monthly payment.
  • Best Car Loans for Bad Credit and No Down Payment – For those who need a vehicle but are unable to get financing due to bad credit or an inability to make a down payment, there may be hope. These five lenders could be the answer, providing assistance to those who need it.
  • How to Get a 0% APR Car Loan – Are you considering taking advantage of a 0% financing deal on a new car? It’s essential to understand how these deals work and to determine if they are the best option for you.
  • I Can’t Afford My Car Payment. What are My Options? – If you can no longer make your car payments, there are certain steps you should take and certain steps you should avoid. It’s important to consider your options carefully and make an informed decision.
Allison Martin
Meet the author

Allison Martin is a syndicated financial writer, author, and Certified Financial Education Instructor (CFEI). She has written about personal finance for almost ten years and holds a master's degree in Accounting from the University of South Florida.