How to get a car loan

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In a Nutshell

When you’re applying for a car loan, there are steps you can take that could help save you money and simplify the process of buying a new or used car. This can includes budgeting for a down payment, comparing loan interest rates and shopping different lenders.

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Whether you buy new or used, a vehicle is a major purchase. And if you don’t have the cash saved up to pay the full purchase price upfront, you may need to get a car loan to finance your new ride.

The average purchase price for new and used cars has been steadily rising, landing at nearly $31,000 for new vehicles and nearly $20,000 for used vehicles in recent years, according to a 2018 report from credit bureau Experian.

If you don’t have that kind of cash lying around, you might decide to apply for an auto loan and pay in monthly installments until you own the car outright.

Consider these simple steps when you’re applying for an auto loan.



Step 1: Set a budget and understand what you can afford

While you may dream of rolling up in a Bentley, most of us will have to have to be a bit more realistic about what kind of car we can afford.

Shop online

What type of car do you want to buy? Start by browsing online for vehicles you like and to get an idea of what you can afford. Are you searching for a new car or used car?

You can check major online sites, like Autotrader and Cars.com, that aggregate available cars from many dealerships, or search the online inventory of a preferred local dealer. You can also start sending inquiries online to get a better idea of pricing before you head to the dealership. 

Set a down payment

How much are you willing to pay out of your own pocket when purchasing your vehicle? The more money you have to pay upfront, the smaller the amount you’ll have to finance, which can potentially save you money on your monthly payment.

This example estimates how much lower your monthly payment could be if you pay more for a car upfront.

Total vehicle cost Down payment Monthly payment (2.99% interest, 60 months)
$20,500 $3,000 $314
$20,500 $6,000 $260

 

You’ll need to make regular payments on the loan until you repay the amount you owe in full. Take a look at your budget to figure out a monthly payment you can afford.

Weigh your monthly earnings after taxes against your expenses, including rent/mortgage, gas or transportation, food, credit card payments and entertainment. Need more advice? The Credit Karma Guide to Budgeting has you covered.

Understand fees

The total cost of your new car will likely include more than just the purchase price. Many lenders or dealers charge some fees — some of which are negotiable. Keep an eye out for these potential fees (as well as any taxes — which aren’t negotiable).

  • Loan origination fee: This is a fee the lender sometimes charges for processing your loan. It might be factored into the cost in a number of ways, including as a percentage of the total loan amount or as a flat fee. Not all lenders charge a loan origination fee, and fees may vary by lender and by state.
  • Title and registration fees: These fees may be required by states to help prove ownership and ensure you get your car’s license plate. You can research your state’s fees through its Department of Motor Vehicles website.
  • Miscellaneous fees: More potential fees you can negotiate include delivery fees, document fees, preparation fees and others. 

Watch your loan term

How long do you want to make car payments? It’s important to understand how the length of your loan term affects your monthly budget and the interest you’ll pay.

Auto loan terms typically range from 36 to 60 months, but can be as high as 84 months or more. A shorter loan term could mean you’ll pay less interest over the life of the loan, but that could result in a higher overall monthly payment. On the flip side, a longer loan term could mean more interest overall but smaller monthly payments.

For example, look at the difference in interest paid on a $15,000 auto loan over different loan terms.

Length Interest rate Monthly payment Total interest paid
36 months 2.99% $436 $701
60 months 2.99% $26 $1,168

 

Keep in mind that some lenders place certain requirements on the vehicle being financed. For example, a lender may limit financing based on the age of the vehicle or its mileage.

Learn more: Should I get a car loan that’s longer than five years?

Step 2: Review your credit reports and credit scores

Your credit reports and credit scores can play important roles in determining your auto loan eligibility and interest rate. Here’s some important information about each.

Credit reports

Make sure to get copies of your credit reports and check for any errors against your credit history. Your credit reports will include information like current or past loans, credit card balances and payment history.

You can also get a free credit report from each of the three major consumer credit bureaus once every 12 months.

Reviewing your reports regularly can help you discover and dispute any errors that may hamper your ability to get a loan. Plus, it’s a good idea to know where your credit reports stand.

Credit scores

Lenders may have minimum requirements when it comes to credit scores, so it can be helpful to take a look at your scores before applying.

Credit scores, which are based on information contained in your credit reports, typically range from 300 to 850, and those with higher credit scores often have access to better interest rates and loan terms.

Lower scores may mean that you have more difficulty getting a loan or that you might pay a higher interest rate. If you’re able, take some time to work on improving your credit before applying for an auto loan.

5 quick tips to improve your credit health

Step 3: Compare interest rates from different lenders

Instead of getting financing at the dealership on the day of your purchase, you can compare auto loan rates from various third-party lenders days or weeks before buying your car.

Why shop around?

  • It allows you to look for the best rates. If you get your loan at the dealership, you may be limited to lenders that are affiliated with the dealer. Casting a wider net may give you access to lenders offering superior rates. On the flip side, a dealer may also be able to beat the rate you’ve been offered by another lender.
  • It’s convenient. You can view multiple potential rates by searching an online loan-rate finder or a lender’s website. But you’ll have to actually apply before you can lock in your exact rate.
  • It’s less stressful. If you get your financing at the dealership, you may face some anxiety as you wait for the verdict regarding loan approval and interest rate. Empower yourself by reviewing your options beforehand and deciding whether to seek preapproval from a lender.

Quick tip: Shopping around for the best interest rate may cause multiple lenders to contact you. To help avoid excessive phone calls and emails, consider creating dedicated contact accounts, like a separate email and Google Voice account, to use while you’re shopping for a car loan. But remember to update your contact information with the lender you end up choosing so that you don’t miss any important messages.

Types of lenders

As you search for your ideal car loan, you’ll find many different types of lenders out there, including the following:

  • Banks — Some national or local banks may cater mainly to those with very good or excellent credit, while others may offer loans to those with lower credit. If you have a preexisting relationship with a bank, this may qualify you for a better interest rate.
  • Credit unions If you’re a member of a credit union, you may find that membership provides you with access to better rates.
  • Online auto loan companies There are also online lenders that specialize in car loans. They vary in terms of the rates they offer and the type of borrower they’ll accept.
  • Peer-to-peer lenders These lenders offer loans that are typically funded by groups of individuals.

Getting prequalified or preapproved

Once you’ve shopped around for interest rates and narrowed down potential lenders, you might decide you want to get prequalified or preapproved for your loan — this helps give you an idea of a loan amount you might qualify for.

Prequalification and preapproval can be confusing, but both essentially mean a lender has assessed your creditworthiness for a loan on some level. But take note: Neither a prequalification nor a preapproval is a guarantee that you’ll get the loan. You’d have to formally apply with the lender to know for sure.

Preapproved vs. prequalified: What’s the difference?

Step 4: Head to the dealer to close the deal

If you’ve had your loan preapproved ahead of time, you may be able to walk into the dealership with an idea of how much money you have to spend.

If you’ve been preapproved at a specific interest rate, share it with the salesperson at the dealership — you may find that the dealer is able to make you a better offer than the one you’ve been preapproved for. If the dealer seems to be offering you a better deal, you’ll need to do your homework to make sure it’s not padding the loan with extra fees.

Read the loan’s fine print carefully before signing on the dotted line, and don’t be afraid to ask questions or negotiate if you see a fee that looks inflated or unnecessary. Depending on your situation, you may want to skip add-on products, like extended warranties or maintenance schedules.

Once you’ve selected your vehicle and agreed on a total price, it’ll be time to actually apply for financing and find out if you’re approved.


Bottom line

Getting a car loan can be simple and stress-free if you approach it in an organized way. Following the steps above may help you find the most affordable loan available to you, so that you can be in your new ride in no time.