How to get an auto loan in 5 steps

Are you looking for a new set of wheels? Whether you’re a first-time buyer or looking to upgrade your ride, familiarizing yourself with how to get an auto loan gets you the best deals.

Buying a car is probably the second most expensive purchase you can make. So, from finding the best rates to negotiating terms, this comprehensive guide walks you through the process to ensure you make informed decisions.

 

How to get a car loan?

 

1. Check your credit

When it comes to any loan, checking your credit score is a crucial step. Your credit score plays an important role in determining your chance and the interest rates you qualify for. Before shopping for auto loans and cars, take a moment to verify your credit score.

A good credit score can open doors to better loan terms and lower rates. So, use credit monitoring services or free credit score websites to check where your credit stands.

If your credit score is lower than expected, don’t worry. There are ways to improve it. Paying bills on time, reducing outstanding debts, and keeping credit card balances low are effective in boosting your creditworthiness.

Make sure you also review your credit report. To access your credit report, you can get your free copy from each of the major credit bureaus — Equifax, Experian, and TransUnion. Afterward, check your credit report for any errors or inaccuracies that may hurt your score.

Taking your time to check and understand your credit score and report sets you on the right path for a successful auto loan application.

 

2. Determine your budget

After checking your credit score, the next step is to decide how much you can afford. A car is a major expense, so make sure you can meet your payments without breaking your budget.

Start with the numbers — your income and monthly expenses, including car loan payments, insurance, gas, and maintenance. How much will the total loan cost you? Can your income cover the overall costs? Considering these expenses will give you a clearer picture of your finance and help you narrow down your search.

Related to the above, consider your debt-to-income (DTI) ratio. This compares your monthly payments to your income and is an important factor lenders consider. To show you can responsibly manage your car loan, try to aim for a lower ratio.

Thoroughly evaluating your budget and other expenses helps you find an auto loan that fits your situation and goals.

 

3. Get pre-approved

Afterward, shop around for different lenders and rates. You can check auto loan offers from banks, lenders, and credit unions, for example. Then, filter your choices, and get pre-approved for a car loan.

Note that prequalification and preapproval are quite different from each other. Prequalification estimates what you may qualify for. Since lenders only do a soft credit check, it doesn’t affect your credit score.

Meanwhile, getting preapproved shows what a bank is willing to offer you. This allows you to check how much you can spend based on the rates they provide. You can get preapproval from multiple lenders, but it involves a hard inquiry, so this can slightly pull your score down. You are not, however, required to sign any actual loan agreements yet.

Pre-approval can give you a clearer understanding of your loan options and rates. So, it can help you negotiate the terms with lenders.

If you’re not sure which one to get, consider at which stage you currently are. Say you’re in the early parts of exploring your options. Prequalification can give you a general idea of what rates and terms you may get.

Otherwise, you can go with the preapproval process. You may weigh in on getting pre-approved if you’re sure you’re ready to purchase a car. Also, preapproval is a good way to get a more accurate assessment of your rates and options.

While both don’t guarantee that your loan will be approved, they can help you plan and budget efficiently. These can help you confidently make an offer and negotiate.

 

4. Choose a lender

Now, it’s time to pick a lender. Comparing different choices helps you find the one that benefits you the most. That said, pay close attention to other factors beyond the interest rates they offer.

For one, check for down payment requirements. Some lenders may require you to put in a bigger down payment while others may not. But the more down payment you have, the less interest you may have to pay. So, it’s usually good to put down at least 20% of the vehicle’s purchase price.

Then, look for competitive rates that fit your budget and save you from higher payments. The annual percentage rate (APR) takes into account the overall cost of your loan. Given this, keep in mind that the lower the APR, the less expensive your loan will be.

On top of your down payment and rates, check how much your monthly payments are. See to it that you select the one that offers payments you can manage. This way, you avoid defaulting on your monthly dues.

Don’t forget to also consider other fees. For example, you need to pay sales tax based on your state. Other than that, you also have to shoulder other dealer fees, like documentation fees.

Check the loan terms as well. While shorter terms may have higher monthly payments, you can actually save money on interest over time. Alternatively, longer terms have affordable payments but may result in higher overall interest.

After all, weighing in different lenders and loans can make a huge difference over the life of your loan. So, explore various options to increase your chances of finding the most favorable terms and conditions.

 

5. Apply for the auto loan

When you find the offer you’re contented with, it’s time to complete your auto loan. If decide to go with a preapproved offer, be sure you follow your lender’s guidelines to finalize your application and receive the funding.

Remember, read the loan agreement carefully — if you’re not sure about anything, ask questions. This way, you clarify them and know exactly what you’re getting yourself into.

Once you’re confident with the terms, you can then sign the paperwork. In some cases, dealerships initiate the funding process with lenders. Though sometimes, you have to get in touch with the lender.

When everything is signed, you can finally enjoy your ride!

 

How to get a car loan with bad credit?

If your credit score is lower than what you expected, it may be better to wait it out a bit. Ideally, you can take steps to lift your score before applying. This, in effect, can help you qualify for a better rate.

• Check your credit reports for any errors. If there are any, address them to improve your credit score.
• Pay all your bills on time.
• If you have an outstanding credit balance, pay it down to decrease your credit utilization.
• Avoid making multiple credit applications in a short period.

If you can’t wait until you increase your credit score, it’s still possible to get a car loan with bad credit. For one, you may save up for a larger down payment. Note that a bigger down payment can balance the risk of your bad credit, so it may also lower your rates.

Another option is to look for lenders that specialize in borrowers with poor credit. They may have more flexible requirements, so you may apply for a loan even if you have bad credit.

In case you can’t go with the options above, consider having a cosigner with good credit. A cosigner is usually a close friend or relative who shares the liability of the loan. If your cosigner has good credit, this can, in turn, influence your rates and terms.

While these choices let you apply for a loan, keep in mind that they tend to have higher interest rates.

 

How does an auto loan from a bank work?

With a car loan from a bank, you’ll usually get pre-approved before you shop for cars. This can help you know how much your loan and car will be. After finding your dream car, you can then purchase it using your loan.

Alternatively, credit unions may offer lower interest rates and more flexible requirements. Say, if you have poor credit, working with a credit union may help. Similarly, many online lenders offer auto loans. But unlike credit unions, online lenders tend to charge higher rates if your credit is not that good.

Car dealerships also offer financing options, allowing you to apply directly through them. This can be convenient and may give you access to special offers exclusive to the dealership. Though dealerships may mark up interest rates, leading to higher rates.

 

Conclusion

Getting an auto loan for a new or used car is a big decision to make. So, check your credit, set your budget, understand your monthly payment, and compare your options before setting your foot down. By understanding how to get your car loan, you can secure a loan you can afford and be confident in your purchase.

 

Frequently asked questions