How to get an auto loan in 5 steps

Posted 04.07.2023

Are you looking for a new set of wheels? Whether you’re a first-time buyer or looking to upgrade your ride, knowing how to get an auto loan brings 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 will walk you through the process of ensuring you make an informed decision.

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 of getting a loan and the interest rates you qualify for. Before shopping for auto and car loans, 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.To access your credit report, you can get your free copy from each of the major credit bureaus — Equifax, Experian, and TransUnion. Afterwards, check your credit report for any errors or inaccuracies that may hurt your score.

2. Determine your budget

The next step is to determine how much you can afford. A car is a major expense, so make sure you can meet your payments without breaking your budget.

Start by looking at 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 finances and help you narrow your search.

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

3. Get pre-approved

Shop around for different lenders and rates. You can check auto loan offers from banks, lenders, and credit unions here on SeeLoans.com. 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. Meanwhile, getting preapproved shows what a bank is willing to offer you. This allows you to check how much you can spend and help you negotiate the terms with lenders.

You can get preapproval from multiple lenders, but it involves a hard credit check that can pull your score down. You are not, however, required to sign any actual loan agreements yet.

4. Choose 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.

Asses the down payment requirements
Some lenders may require a 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.

Search for low annual percentage rates
Look for competitive interest 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. The lower the APR, the less expensive your loan will be.

Check your monthly payments
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 and other dealer fees.

Weigh the loan terms
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.

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

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.

Bad credit car loans

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.

Consider a cosigner

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.

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

What credit score do you need to get a car loan?

While there’s no set credit score to apply for a car loan, better credit means lower loan costs. For example, if your score is above 660, you may qualify for lower interest rates and favorable terms. However, if your credit score is below, your lender may offer you higher rates.

Remember that lenders also assess other factors aside from your credit scores, such as your income and employment. It’s also worth it to note that credit score requirements vary whether you’re buying a new or old vehicle.

Are auto loans hard to get approved for?

Getting approved for auto loans depends on your credit history and financial situation. Typically, if you have good credit and demonstrate that you can meet your monthly payment, it may be easier to get approved. But if you have poor credit or struggle to satisfy lenders’ requirements, it may be quite challenging to secure your loan.

Is it better to finance a car through a bank or through a dealer?

Direct lending through your bank or credit union requires thorough research and comparison. However, they often provide lower interest rates. Dealership financing helps you save time from shopping around, but dealers usually add a markup when you get a loan through them. So, this leads to higher interest rates.

Carla Soto

Carla is a skilled copywriter at BestFind with a background in marketing and communications. She specializes in reviewing personal loan and finance products to help readers navigate the complex world of personal finance.