How to get a car loan

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By georgeskef

These eight steps will help you get an auto loan at the lowest rate. Before you go to the dealership, make sure to take certain steps such as preapproval and shopping for lenders to get the best car loan rate.

1. Examine your credit report

Your credit score, income and credit history will impact how much you can borrow and at what interest rates.

Do not apply for an auto loan without first checking your credit history. You could lose your loan application or be denied a loan if you have incorrect or incomplete information, such as fraud.

You’re entitled to a free copy of your report every 12 months from each of the major reporting bureaus (Equifax, Experian and TransUnion) at You can request a copy your credit report every week through April 20, 2022, due to the pandemic. You should file a dispute if you discover errors or evidence of fraud in your credit report before applying for a car loan.

Credit reports are used to calculate credit scores. Many banks, credit card companies and personal finance services such as NerdWallet offer free online credit scores along with report information. These are helpful ways to track your progress but may not be the ones lenders use to approve. Many auto loan lenders will use specialized scores to highlight your past history of repaying auto loans.

You don’t necessarily need a car immediately if your credit score is 600 or below. You can improve your credit score by making timely payments and paying off credit card debts.

To get an idea of the rates for people with a good credit rating, you can search average interest rates.

Your credit history is as important as your current credit score for most lenders. This means that if you have paid off your previous auto purchases you are more likely be approved for a loan or to get a lower interest rate. Contrarily, prime credit scores may be offset by a short credit history or no prior auto loans.

Credit requirements are not the only ones. You will also need to meet minimum income standards, and have a steady work history.

2. Multiple lenders offer auto loans

After you have checked your credit, it is time to start looking at auto loans and lenders. These can be classified as:

  • National banks large like Capital One or Bank of America are a good example.
  • Credit unions and banks in the local community.
  • Online lenders who only offer auto loans
  • Dealership financing or through “captive” lenders for automakers.

Compare quotes from all three lenders, even if dealership financing is your goal. If you are willing to make automatic loan payments from your checking account, your bank or credit union might offer a better rate. You can also search for auto lenders online.

You should check with each lender if you are able to purchase your car directly from the seller. There are restrictions on where you can purchase your car.

You should take the time to understand the language of car financing before you apply for a loan.

3. Preapprove for an auto loan

After narrowing down your search to a few lenders it’s time for you to request interest rate quotations and compare offers. You can get the best rate by getting lenders to compete for you business. Car loan interest rates can vary widely because different lenders will weigh credit reports differently.

You can apply to lenders to be prequalified or preapproved for loans. You need to be aware of the differences between these terms.

Based on limited information about your credit history, pre-qualification gives you an estimate of the rate or loan amount that you may be eligible for. Pre-qualification does not require a credit check. The rate you get could be affected by a credit check.

Preapproval is an upgrade to pre-qualification. Preapproval requires a “hard”, credit pull that temporarily lowers your credit score. The estimated rate will be closer to what you get once your loan application is approved because the lender has more information on your credit history.

Getting preapproved for an Auto Loan is a great way to get your car.

Multiple inquiries about your credit in a short period of time count as one inquiry. Pre-qualification and preapproval do not guarantee approval of your auto loan. While both can assist you in planning and budgeting your car purchase, preapproval shows the dealer that you are serious about financing.

4. To set your budget, you can use your loan offer

Preapproval letters will indicate the maximum amount that you can borrow. However, this is not the price you can purchase a car. Add 10% for taxes and fees. To design your loan, use an auto loan calculator. To find the best monthly payment for you, enter your down payment, trade in value of your vehicle, and terms.

You can borrow less if the payment is too high for you. Even if you are told that you can afford more, it is far more important to be capable of making your loan payments comfortably.

5. Locate your car

Once you have access to financing and know how much you can finance for your car, you are ready to pick out your ride.

You can avoid disappointment if you already have your heart set on a car. Make sure to look at the available loan options:

  • Brands that are not included. Certain car manufacturers and types, like electric cars, are excluded by lenders.
  • Dealership requirements. Some lenders, like Capital One require that you shop through a particular network of dealers.
  • If you plan to purchase a car from someone else, there are some requirements for lenders.
  • There are time restrictions. Lenders typically give you 30 days to make use of the loan. You can extend your loan if you run out of time.

6. Read the dealer’s offer for a loan

After you have taken a test drive, and found the car you like, you might still be eligible for a better interest rate from the dealer.

Some carmakers have their own banks that they use exclusively to purchase autos through dealers. If you are preapproved for a rate, the finance manager will likely attempt to beat it to win your business. It’s okay to apply to see what your interest rate could be.

If you don’t wish to play that game with the salesperson, tell them you are preapproved. You should tell the salesperson that you are a cash buyer so you can negotiate on the car’s price and not your monthly payment.

7. Finalize and choose your loan

Congratulations! If the dealership beats the preapproved rate (and all terms), you can be sure you have a great financing rate. You can accept that loan without considering any other offers. Before you sign, make sure to carefully read the contract.

  • Hidden fees. You will be charged sales tax, documentation fees, and registration fees in addition to the price of the car. Ask about any additional fees.
  • A longer loan term. The APR can make your loan term cost hundreds more, so consider adding 12 months. Be aware of dealership rates that are lower than those for longer loans.
  • You can often find cheaper alternatives to add-ons that you don’t want, such as gap insurance.
  • A penalty for early payment. This is not a common feature in auto lending contracts, but it’s worth checking.

Follow the lender’s instructions to submit your loan application and close funding if you accept your preapproved offer. Sometimes a dealer representative will contact you to initiate funding. In other cases, you can follow up directly with the lender.

Private sellers will likely ask for cash or a cashier’s check if you are buying a car. After you have selected the vehicle, you will need to contact the lender to discuss the details of closing the transaction. You will then sign the paperwork. While it’s a good idea still to review the contract for each item, you are safer if you don’t finance through a dealership.

8. Pay on time

Once your auto loan has been secured, you can drive off into the sunset. Don’t forget to make on-time payments on your car finance. Most likely, your lender will give you online access to your loan information. From there, you can make automatic payments. This will help you build your credit score and allow you to obtain a loan at better rates.

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