How to Get a Car Loan
Between choosing a lender, understanding credit requirements and deciphering interest rates, fees, taxes and down payments, buying a car may sound overwhelming. However, getting a car loan doesn’t have to be difficult. The process can be quite simple: review your credit history, set a budget, get preapproved for a loan, choose a lender and close the loan. We’ll walk you through each step to help you understand how to get a car loan.
1. Check your credit report
Since your credit reports are used to calculate your credit score, it’s important to check them before applying for a car loan. You can check your credit reports with the three major credit bureaus (Equifax, Experian and TransUnion) by visiting AnnualCreditReport.com.
Review your credit reports carefully for any potential errors — mistakes on your credit reports can have a negative impact on your credit score. If you find incorrect information, you can submit a dispute to the reporting credit bureaus and creditors. Credit bureaus have up to 60 days to respond to a dispute.
Average APRs for auto loans
Your credit score is a major factor in determining the annual percentage rate (APR) you’ll receive on your auto loan. If your score isn’t as high as you’d like it to be, taking steps to improve your credit score before applying can result in big savings over the life of your loan.
| Credit range | Average APR |
|---|---|
| 781 – 850 | 4.75% |
| 661 – 780 | 5.82% |
| 601 – 660 | 8.12% |
| 501 – 600 | 10.79% |
| 300 – 500 | 13.42% |
Source: Experian’s State of the Automotive Finance Market, Q4 2022
Getting a car loan with bad credit may be challenging, but it’s not impossible. Some lenders have more flexible credit requirements and offer bad credit car loans, though they often come with much higher interest rates.
As you repay your auto loan responsibly each month, your credit score is likely to improve. Eventually, you may be able to refinance your auto loan for a lower interest rate.
Asking a trusted friend or family member to cosign your car loan can make it easier to qualify if you have a thin credit history or bad credit score. Using a cosigner can increase your creditworthiness in the eyes of auto lenders since two people will be responsible for repaying the loan instead of one.
During the application process, your cosigner will also have to go through a credit check and verify information like their income, employment and identity. Make sure your cosigner understands that if you’re unable to repay the loan, they will also be held legally responsible for repayment.
2. Determine your budget
Before taking out a car loan, you’ll want to determine how much you can afford. You can use an auto loan calculator to estimate how much you’ll pay each month and how long it’ll take you to repay the loan.
An important factor in determining your budget is deciding whether to purchase a new or used car. New cars are typically more expensive, but they tend to have better financing options than used cars and come with all the modern bells and whistles. Used cars, on the other hand, cost less and experience less depreciation in value.
The 20/4/10 rule
The 20/4/10 rule can be a solid guide when deciding how much you want to spend on a new car. For an auto loan to be affordable, this rule suggests that consumers should:
- Offer a 20% down payment
- Select a repayment term of no more than 4 years
- Keep total transportation costs under 10% of their monthly income, including the auto loan, gas, insurance and maintenance.
While there is no one-size-fits-all guideline for every car buyer, following the 20/4/10 rule can help ensure that you don’t overspend.
Current auto loan rates
Starting auto loan rates currently range anywhere from 4.00% to 8.99%, depending on the lender. The rate you receive will depend on a variety of factors like your credit score, how much you borrow and how long your repayment term is.
3. Get preapproved
Getting preapproved for an auto loan can help remove some of the guesswork. Since this is a firm offer from a lender, it can provide you insight into what you can expect.
Having an auto loan preapproval in hand may even help you negotiate better offers. When you apply for an auto loan through a dealership, dealers can — and often do — inflate your APR to increase their profit. By getting preapproved before visiting the dealership, though, you’ll already know the rate you qualify for and won’t be talked into spending more than you should. Plus, you can always ask the dealer to beat your preapproved rate.
Types of lenders to consider
When you shop around for a car loan, there are several common types of lenders to consider:
Credit unions
Auto loans from credit unions tend to have the lowest APRs, since the profits go back to the credit union members in the form of lower interest rates and higher yields on savings products. You’ll have to become a member of the credit union to receive a loan, but it may be easier to join than you think.
| Pros | Cons |
|---|---|
May have lower interest rates than banks, online lenders and captive dealer financing Typically comes with fewer fees than other types of lenders Since credit unions tend to be community focused, you may have an easier time qualifying | Must become a member of the credit union to receive a loan May have to pay a membership fee or other costs associated with becoming a member May not offer the cutting-edge technology that you’d find with big banks or online lenders |
Banks
Similarly, banks also typically charge few fees and offer competitive APRs. However, banks tend to have stricter eligibility requirements, so if you have a less-than-perfect credit score or a lot of debt, you may have a harder time qualifying for a bank loan.
| Pros | Cons |
|---|---|
Offers competitive APRs Charges few fees, if any Tends to have access to user-friendly technology | Typically need to have good to excellent credit to qualify May have to visit a branch in person to complete the application process Some banks only offer loans to established customers |
Online lenders
Online lenders tend to be more flexible when it comes to credit requirements. If you have fair or bad credit, getting an auto loan from an online lender may be a good option. However, online lenders may have higher APRs and fees than credit unions and banks.
| Pros | Cons |
|---|---|
May have more flexibility for credit requirements Everything takes place online so you won’t have to visit a branch Lending process may be quicker | Likely to come with higher APRs than credit unions or banks May charge higher fees Since everything is online, the process may feel impersonal |
Captive dealer financing
Many auto companies — including Ford and Toyota — offer their own loans. This allows you to streamline the lending and purchasing process since you’re doing it all at once. However, dealerships typically come with higher interest rates than other types of lenders.
| Pros | Cons |
|---|---|
Streamlines the process of buying a car and taking out a loan Borrowers with fair or bad credit may have an easier time qualifying Borrowers with excellent credit may qualify for promotional deals, including 0% APR | May come with higher interest rates and fees Shoppers may feel pressured to buy unwanted add-ons May approve high-risk borrowers for auto loans they can’t truly afford |
Preapproval vs. prequalification
Preapproval is different from getting prequalified. While a preapproval confirms that the lender is willing to offer you a specific loan amount, prequalification is just an estimate of what a lender may offer you based on a soft credit inquiry. Prequalifying for a loan doesn’t guarantee you’ll be offered one, nor does it lock in an interest rate.
| Preapproval | Prequalification |
|---|---|
Will temporarily ding your credit score since the lender ran a hard credit pull Can provide a starting point for negotiating the price of a vehicle This is a firm offer from a lender, outlining what APRs and amounts they are willing to provide | Doesn't impact your credit score since lenders use a soft credit pull Since it’s not a firm offer, you’re likely to receive a different APR than estimated during prequalification This is merely a rough estimate of what a lender may offer and isn’t set in stone |
Car loan application requirements
When a lender reviews your car loan application, it may consider the following factors when determining whether you qualify:
- Credit score
- Credit reports
- Debt-to-income ratio
- Income
- Employment
- Any accounts in default
- Recent bankruptcies
To expedite the application process, it’s a good idea to have the appropriate car loan documents ready to send to the lender, including proof of identity and income.
4. Select a lender
Once you’ve compared multiple loan offers, it’s time to narrow it down to one lender. Be sure to compare features such as down payments, interest rates, fees, terms and borrowing limits. You may also want to ask about unique features, like financial hardship support.
Reviewing your offers
When reviewing your loan offers, be sure to pay close attention to the following details:
- Down payment: A down payment is how much money you intend to offer a lender upfront for a car. Typically, you’ll want to put down at least 20% of the total purchase price. The more money you offer, the less you may have to pay in interest.
- APR: The APR on your car encompasses both the interest and fees you’ll have to pay. Generally, the higher your credit score, the lower the APR a lender may offer.
- Fees: In addition to taxes, fees are another prepaid item that might be rolled into the total price of your loan. This might include prepayment penalties or common dealer fees like documentation fees, destination fees or GAP insurance.
- Taxes: Regardless of the lender you choose, you’ll have to pay sales tax when you buy a car. How much you pay will depend on your state of residence. In some instances, your car purchase may come with tax-deductible benefits.
- Terms: Your repayment terms determine how long you’ll repay your car loan, usually expressed in months.
- Monthly payment: While getting a loan, you’ll want to make sure you can afford the minimum monthly loan payments. A longer loan term translates to smaller monthly payments, but more money spent in interest charges.
How do I choose the best lender?
The best lender for you depends on your unique financial position. A good rule of thumb is to select the lender that will cost you the least amount of money. By comparing multiple loan offers, you can be sure you got the best deal on your auto loan.
Credit scoring models take rate shopping into account and group similar credit checks together. As long as you do all of your comparison shopping within a 14-day window (45 days for newer scoring models), your credit history will only reflect a single hard inquiry.
5. Finalize your loan
After you choose a lender, it’s time to finalize your car loan and sign a stack of paperwork.
Every auto financing contract comes with a federal truth-in-lending disclosure that clearly outlines your APR, the financing charge, the amount borrowed, how much you’ll pay overall and the total sales price. It’ll also include the number of payments you’ll make, when they’re due and how much you’ll owe each month.
Since you typically aren’t able to return the car after you’ve signed for it, be sure you’ve read all the fine print and are confident in your decision. If you see any odd fees or add-ons, ask the dealer to explain and/or remove them.
When everything is right, sign the contract. You did it! Congratulations on your new loan and car purchase.