Searching and applying for an auto loan: How to get it right

Young man visiting car dealership and coveting car while wondering how he'll finance it. Young man visiting car dealership and coveting car while wondering how he'll finance it. Image:

In a Nutshell

When you're on the hunt for a new car, you probably spend a lot of time thinking about make, model and maybe even color. But do you spend enough time thinking about how you're going to finance it?

Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors' opinions. Our marketing partners don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when it’s posted.
Advertiser Disclosure

We think it's important for you to understand how we make money. It's pretty simple, actually. The offers for financial products you see on our platform come from companies who pay us. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials.

Compensation may factor into how and where products appear on our platform (and in what order). But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates.

Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can.

While some people spend hours negotiating the buying price of a new vehicle, finding the right financing can be just as impactful on your wallet.

If you’re not sure where to start, here are the answers to five common questions many people have when searching and applying for an auto loan.

1. Where should you look for an auto loan?

Some people spend hours researching different vehicles online before setting foot on a car lot and taking a test drive. But when it comes to choosing an auto loan, the same person might simply go with one of the financing options offered by the dealership.

Olga Dolchenko, director of auto lending at online lender Avant, says, “Dealers may work with different lenders and may be compensated differently depending on which lender they use.” She suggests doing your own research before going to a dealership. “Even if you wind up using the dealer’s financing, at least you know how it compares,” Olga says.

Where can you look for auto loans? Online lenders are one place to start, as are banks and credit unions.

Find an auto loan that works for you

Shop Now

2. What should you consider when comparing auto lenders?

Auto lenders may have different criteria, and the terms you receive can vary from one lender to another. Shopping for the best loan terms can lead to significant savings, even if there’s only a difference of a percent or two. For example, on a $20,000 loan paid off over five years, the difference between a 4-percent and 6-percent loan could end up being around $1,100.

When comparing lenders, find out what types of purchases they finance and if they have any special requirements. For example, some lenders only work with dealers that are affiliated with auto manufacturers, while others work with independent dealers and will finance purchases from private sellers.

Financing options for used cars can be tricky, as lenders may have additional requirements regarding the vehicle’s age, mileage or model. For example, Bank of America issues auto loans for used vehicles, but only if they’re less than ten years old, have fewer than 125,000 miles and don’t have a salvage or rebuilt title.

3. What does pre-approval mean?

An auto loan pre-approval is a tentative loan offer based on the applicant’s financial and personal information. Pre-approval isn’t a guarantee that you’ll get the loan later, especially if your financial situation changes, but it can help guide your budget.

You can submit several pre-approval applications to compare offers from different lenders. You might get pre-approved for different amounts, repayment periods and interest rates.

The pre-approval process often takes just a few minutes online. You may need to share your name, contact information, Social Security or Tax Identification Number, mortgage or rent payments, information about your employer and salary, and the make and model of the vehicle if you have a particular one in mind. The lender may check your credit and contact your employer or landlord to verify your information.

You can show the pre-approval offer to sellers as proof that you will likely be able to finance the purchase. It can be a valuable negotiating chip, and you can use it to try to get dealers to lower their price to meet your pre-approved amount or offer better financing terms. Or, it can be your excuse to turn down pricey add-ons that salespeople try to upsell.

The pre-approval will likely have a time limit and may be contingent on the vehicle and verification of your financial situation.

4. How is your credit involved in the auto loan process?

To get the best auto loan rates, you may need an excellent credit score. However, some auto lenders approve loans – albeit with worse terms – for borrowers with poorer credit.

Rich Hyde is chief operating officer of Prestige Financial Services, which provides auto loans to people with poor credit through dealerships across the country. According to Rich, they don’t have a minimum credit score requirement. Instead, they look at the applicant’s entire financial picture, including the applicant’s job and residency stability, income versus monthly payments and total debt, and payment history.

Other lenders may have minimum credit score requirements, and the applicant’s credit score could play a larger role in determining the loan’s terms.

Before applying for a loan, you may want to review your credit report and dispute errors that could be impacting your score. You can review your credit scores as well, but keep in mind that auto lenders might use specialized credit scores created for auto lending. The FICO® Auto Score is one such score. It ranges from 250 to 900 and may place greater importance on auto-related past payments, defaults or repossessions than a non-industry-specific score.

Some lenders can pre-approve you for a loan with only a soft inquiry into your credit report, which doesn’t harm your credit, but others will make a hard inquiry, which could harm your credit. Check with the lender before submitting an application so you’ll know if your credit could be affected.

You may be able to shop around for the best loan without severely impacting your credit — some credit scoring models view multiple inquiries within a certain time period as just one. You can try to use this window to get multiple pre-approvals from the lenders that require a hard inquiry, and finalize the loan with whichever lender gives you the best terms.

5. What paperwork is involved with the auto loan process?

You may be able to complete the auto loan process over the phone or online, but sometimes you’ll need to send copies of some documents or bring them with you to the dealership when you purchase a vehicle. The documents vary depending on the lender, but typical required documentation includes paycheck stubs, proof of residence and a valid driver’s license.

During the final buying process, you may also need to send the purchase agreement, registration, title and lease buyout instructions (if applicable) to the lender. You’ll also need proof of auto insurance if you plan to drive the vehicle off the lot.

Bottom Line

When financing your vehicle, compare loan options and offers from several lenders. You could wind up saving a significant amount of money with minimal impact on your credit, and a pre-approval can help you set a budget and negotiate from a position of strength.