how to get a car loanMaskot/Getty Images
- Start by setting your budget and checking your credit score to avoid any surprises. Then, get pre-approval offers from banks, credit unions, or other lenders.
- Compare the offers, looking for the lowest interest rate. Then, head to your dealership to pick out your car and finalize your loan offer.
- Read more personal finance coverage.
Getting a loan for your new (or new-to-you) car purchase may sound daunting, but it’s not hard. Follow nine steps to make sure that you’re getting the best possible deal on your future car’s financing.
Financing can be arranged either on your own or through a dealership. While dealership financing can be the simplest way to get your car financed, it isn’t always the cheapest. Make sure to shop around with other lenders to know what interest rates your credit and circumstances are eligible for.
1. Check your credit
To get a car loan, your first step should be to check your credit report and credit score. Your credit score is a number on a scale ranging from 300 to 850 that looks at your borrowing history to tell lenders how likely you are to repay what you borrow. It can be found for free through sites like Credit Karma .
Your credit score will have a big impact on the amount you’ll pay to borrow, or the interest rate of your loan. There’s no official minimum credit score needed to buy a car, but the best interest rates go to borrowers with credit scores above 660 . Knowing your credit score up front can help you tailor your lender search to your specific situation, and avoid any surprises as you start shopping.
2. Determine how much you need to borrow, and what you can afford
This far in the process, you should already know what type of car you’re aiming to buy. Now is the time to get more specific. You’ll want to consider:
- The monthly payment. How much can you afford to pay each month?
- How much you can put down. The rule of thumb is a 20% down payment on a car. The more money you can put down up front, the smaller the monthly payment will be.
- How long a loan you’ll need. Longer loans may reduce the amount you owe each month, but they could cause you to be “upside down” on your loan, a situation where the amount due on your loan is greater than the car’s value. Cars are notorious for depreciation, or losing significant value over time. Choose a loan that’s 60 months or shorter to avoid an upside-down loan. If your loan is too long, consider choosing a less expensive car, making a larger down payment, or paying more each month.
4. Choose a few lenders you’d like to work with
Once you know how much you can afford and your credit score, start looking for a lender. A few options include:
- Credit unions. These local institutions often offer low interest rates than large banks. You’ll have to become a member, and membership is usually bound to things like geographic location or an employer.
- Banks. Most banks also give loans like auto loans. Banks you already have a relationship with may offer you affordable rates, and that may be worth a look. However, many larger banks’ auto loans generally start with a higher interest rate than credit unions.
- Online lenders. A number of online-only banks and lenders offer car loans. While they can sometimes offer lower rates due to the fact that they don’t have any overhead costs, there’s no brick-and-mortar office to visit if that’s important to you.
5. Get pre-approved through those lenders
Once you’ve picked a few lenders, start applying for pre-approvals. A pre-approval is a bank’s way of conditionally saying that they’re willing to lend to you. You can get pre-approved by as many lenders as you’d like you’ll want to check with a few lenders to compare the interest rates they offer.
Dealerships can also help you arrange financing, but it’s worth shopping around beforehand. It’s common practice for dealerships to mark up financing rates, so shopping around could help you be sure that the dealership’s offer is the best deal.
6. Compare your pre-approval offers
Once you start getting pre-approvals, you’ll have two weeks to gather as many as you’d like without having multiple hard credit inquiries appear on your credit report they’ll all appear as one. Pre-approvals are generally good for 30 or 60 days, depending on the lender.
Compare your pre-approval offers to find the offer that best fits your monthly budget, carries the lowest APR or interest rate, and has the shortest term.
7. Accept an offer
Now is the time to accept the loan offer that you’re happy with. Make sure you have the proper documentation on hand, like your driver’s license, proof of income, proof of insurance, and proof of residency, depending on the lender. You’ll also want to bring the pre-approval paperwork and your checkbook if you’re making a down payment. The bank will then arrange for the funds or a blank check to be sent to you or the dealership, and you’re ready to buy the car.
8. Head to the dealership
This is the fun part: Pick out the car. Then, you’ll sign some paperwork at the dealership. Oftentimes, the lender you choose will send you a blank check, and you’ll fill it out once you and the dealer have settled on a price. You’ll make your down payment at this point, too.
After you’ve left the lot, the lender will send you information on how much you owe and how to pay.
9. Make (and potentially automate) your payments
Many lenders offer a small interest rate discount when you sign up for an automatic payment it makes your car payment one less thing to think about, and could takes a bit off the interest you owe. When you set up automatic payments, funds will be automatically deducted from your bank accounts on a monthly date you choose.
Autopay can be set up through your lender online or over the phone. Many lenders will let you know about rate discounts before and as you apply on their websites, or through the paperwork sent to you after finalizing your loan.