How to Get a Car Loan: Take These 4 Steps

Car loans can help you fill a funding gap when you're ready to buy a new (or new-to-you) vehicle, and the process for getting a car loan is fairly simple: compare rates, choose a lender, and apply. Getting a good deal on a car loan, on the other hand, requires some research. We'll help you find a vehicle loan that fits your needs and budget.

4 steps to get the best car loan

The best car loans allow you to borrow enough to purchase the vehicle you want at monthly payments you can afford. With that in mind, here's a simple checklist for finding the right loan.

1. Set your budget

The first thing you must decide is how much you plan to borrow. When choosing the vehicle’s year, make, and model, consider the overall cost and what you can afford to pay each month.

For perspective, the average new car loan payment was $744 in February 2024, according to the Cox Automotive/Moody's Analytics Vehicle Affordability Index. However, car payments are only one consideration when setting a car-buying budget. You also need to consider:

• Car insurance premiums.
• Fuel costs.
• Maintenance.
• Repairs.

If your budget is limited, you may need to rethink your expectations for how much you can borrow. Estimating your monthly payments using an online car loan calculator can give you a baseline number with which to work.

2. Check your credit

A credit check is usually required for a car loan. Lenders check your credit to see how you handle debt. A higher credit score indicates you're more likely to repay what you owe on time. A lower score could make you look riskier to a lender.

Ninety percent of top lenders use FICO scores in credit decisions. You can check your score for free at myFICO.com. You can also check your credit report for errors or inaccuracies that may hurt your score. If you find an error, you have the right to dispute it and have the error corrected or removed.

3. Decide what type of car loan to shop for

There's more than one way to get a car loan. Some car financing options include:

• In-house or dealer financing.
• Vehicle loans offered by traditional banks or credit unions.
• Loans from smaller regional or community banks.
• Car loans from online lenders.
• Financing companies.
• Car loan marketplaces that help match buyers with lenders.

Your financing choice can depend on several things, including your credit scores and the level of convenience you're after.

In-house or dealer financing, for instance, may be easier to qualify for with poor credit. The drawback is that it can be more expensive if you're paying a higher rate or more in fees. But it's possible to get financing and drive away the same day.

You may be able to secure a lower rate through a traditional bank loan, especially if you get the loan through your current bank. You may qualify for relationship rates or rate discounts if you've been a loyal customer. The downside is that the loan may take a little longer to process.

4. Check your rates

You can compare the cost of various financing options by getting interest rate quotes from different lenders. Look for lenders that offer rate quotes without impacting your credit.

Tip: Use a lending marketplace to get quotes from multiple lenders in one place.

Once you have your quotes, compare the following terms side by side:

• Interest rates.
• Repayment terms.
• Monthly payments.
• Fees.

Some lenders may prequalify or preapprove you when you request a rate quote. Neither guarantees that you'll be approved for a loan, but they can give you a better idea of the terms you'll likely qualify for.

If a lender offers car loan preapprovals, determine if a hard credit check is required.

Car loan application requirements

Filling out a car loan application is similar to applying for other types of loans. You'll need to provide basic personal information and supporting documents requested by the lender.

Here is what a typical application requires.

Personal details

The first section of a car loan application typically focuses on your personal information. Here, you'll need to include your:

• First and last name.
• Full address.
• Phone number and email address.
• Date of birth.
• Social Security number.

You may also be asked for your driver's license number. This information is used to verify your identity. Your Social Security number is required to perform a credit check.

Income and expenses

The next section of the application centers on your financial information. You may need to tell the lender:

• Your employer's name and phone number.
• How long you've been employed, and your position.
• Monthly gross income.
• Whether you rent or own a home.
• Your monthly housing payment.
• Your total monthly expenses.

Lenders use these details to gauge your financial stability and ability to repay a car loan. You may also be asked to enter your bank account information in this section.

Vehicle information

Car loan applications also ask for details about the car you plan to buy. Specifically, you may need to share:

• Whether you're buying a new or used vehicle.
• The loan amount you're seeking.
• Your preferred repayment term.
• The down payment amount (if any).
• Whether you're applying with a cosigner.

You may also be asked if you have a previous bankruptcy filing in the last seven years. If so, you may be asked to explain the circumstances.

References

Some lenders may ask you to provide references who can vouch for you personally or professionally. References can be close relatives who don't live with you, family friends, or people you work with.

For each reference, you'll need to provide the following:

• Name.
• Contact information.
• Relationship to you.

Tip: If you plan to add someone as a reference to a car loan application, give them a heads-up beforehand so they're not surprised when a lender calls.

Documents required to apply for a car loan

There are certain documents a lender might ask for when you apply for a car loan. They can include:

• Recent bank statements.
• Pay stubs or W-2s.
• Tax returns if you're self-employed.
• Valid, government-issued photo ID.

Lenders can use the information on these documents to verify your identity, income, and the source of your down payment funds.

Considerations to get a car loan

Different factors can affect your ability to get a car loan and the best terms. Knowing what lenders are looking for can be helpful.

Credit requirements

There is no universal minimum credit score required for a car loan. Individual lenders decide where to set the cutoff.

Some lenders prefer borrowers with good or excellent credit. Others may offer loans to car buyers with bad credit. Checking your credit can give you an idea of your category.

Here's how FICO score ranges work and what constitutes a "good" credit score.

• Poor credit: Below 580.
• Fair credit: 580 to 669.
• Good credit: 670 to 739.
• Very good credit: 740 to 799.
• Excellent credit: 800+.

Loan repayment terms

When you apply for a car loan, your lender might ask which repayment term you prefer. Your choice of loan term matters.

A longer loan term can lower your monthly payments, but you’ll pay more interest throughout the loan. Opting for a shorter term could save money on interest, but your payments will be higher. If you've already set your car-buying budget, then you should have an idea of which one is better for you.

Keep in mind that you can refinance a car loan later if you'd like to change your loan terms. How far along you are in your current loan can influence how much you save on interest.

Rates

Getting the lowest interest rate on a car loan should be a priority since a lower rate can mean lower payments and less paid toward interest overall.

If you've gotten rate quotes, you can plug them into a car loan calculator to estimate your monthly payments and total borrowing costs. You can then compare that to your budget to see if it's doable.

What if your rates are higher than you'd like? In that case, you might continue shopping for a better loan. Or you could work on improving your credit score to qualify for more favorable terms.

That might mean delaying your decision to buy a car. However, if you get a less expensive loan later, it could pay off in the long run.

Down payment

Buying a car with no money down is possible, which is a plus if you don’t have much cash saved. The downside is that the smaller your down payment, the more you'll have to finance. A larger loan can increase monthly payments.

How much to put down on a car? The best answer is as much as you can afford. Every dollar you can pay upfront toward your car purchase is one you won't have to pay interest on later.

How to apply for a car loan

If you've decided on a lender, you can move on to completing your application. Many lenders allow you to apply for a car loan online. However, if you're applying for a loan at a local bank or credit union, you may need to fill out a paper application at a branch.

Here's how to apply, step by step:

• Fill in your personal information, including your name, date of birth, and Social Security number.
• Add your employment and income information, including how long you've worked for your employer and your monthly gross pay.
• Provide details about the car you're planning to buy and how much you need to borrow for the purchase.
• Add two to four people the lender can contact for references if required.
• Explain any adverse credit history, including bankruptcy, if asked to do so.
• Review the information to look for errors.
• Sign and date your application and return it to the lender.

Once the lender has the application they'll complete a hard credit pull and verify your income and employment. How long it takes to get approved is unique to every lender.

If approved for a car loan, you can review the loan agreement before signing and ask questions about anything you don't understand. Specifically, you'll want to review the following:

• Annual percentage rate (APR).
• Finance charges.
• The amount you're financing.
• Monthly payment amount and number of payments.
• Payment due date and any penalties for late payments.
• Prepayment penalties and other fees.
• Total sale price, less your down payment, and including any fees you're required to pay.

You'll give the down payment to the lender and sign off on the paperwork. Your lender will also ask for proof of insurance for the vehicle you're buying.

What are the alternatives?

If you're unable to qualify for a car loan due to having poor or no credit or another reason, you may have other options for financing a vehicle purchase. Here are some of the possibilities you might consider.

Personal loan

Personal loans let you borrow a lump sum and repay it over time with interest. If bad credit is a barrier to getting a car loan, you may still be able to qualify for an unsecured personal loan.

Remember that the interest rate may be higher than on a car loan. The upside is that personal loans are unsecured, meaning you don't need any collateral to get one.

Credit card

If your credit card limit is high enough and your dealer allows it, you might be able to use it to buy a car.

The downside is that credit card APRs can be steep, making this a potentially expensive way to borrow. Additionally, maxing out your credit card limit can hurt your credit utilization ratio, affecting your credit scores.

Pay cash

Paying cash for a car means you don't have any debt to repay. And you're not forking over money toward interest charges, either. However, if you drain all of your savings to buy a car, you could be at risk if a financial emergency arises.

You could ask a close family member for a loan if you don't have cash. They may be willing to loan you what you need to buy a car. Be sure to work out a loan agreement in writing beforehand, and don't borrow money from people you know if you can't afford to repay it. Otherwise, you risk harming the relationship.

TIME Stamp: Do your research when getting a car loan

A car loan is a big financial responsibility and it's important to know what you're getting into before you buy. Taking time to compare lenders and estimate your budget can help you make the most informed decision possible when you're ready to get behind the wheel of a new (or used) car.

Frequently asked questions (FAQs)

Can you get a 0% interest rate on a car?

New car dealers may offer 0% interest rates on car loans, but they're not easy to qualify for. You'll generally need to have exceptional credit to qualify for a 0% interest auto loan.

How do you get preapproved for an auto loan?

You can get preapproved for an auto loan by providing some basic information to a lender. That includes your name, estimated credit score, the amount you want to borrow, and your income. Lenders can use that information to offer a rate quote with no credit check. A hard credit check is usually required if you're completing a full application.

Can you negotiate auto loan rates?

A little negotiating is expected when buying a car and it may be possible to talk the dealer down. Getting pre-approval quotes from multiple lenders gives you a stronger position to start from when it's time to talk terms. Keep in mind that offering a larger down payment could also work in your favor when trying to get a lower car loan rate.