Key takeaways

  • Knowing your budget and improving your credit score will help you qualify for the best rates.
  • Apply for preapproval with multiple lenders to see what loan terms you qualify for.
  • Review your contract and sign up for autopay to take advantage of discounts, if available.

Buying a new or used car can be complicated. Breaking it down into simple steps can help you avoid car shopping’s biggest headaches.

Your budget, lender options and the type of vehicle you want to buy will all influence how you get an auto loan. Ultimately, shopping for a loan will be the best way to score a competitive deal.

1. Determine your budget

Before you apply for a loan, you must determine how much car you can afford.

  • Review your current finances. Lenders consider your debt-to-income (DTI) ratio, income and credit score when determining if you qualify for an auto loan.
  • Consider the full cost of ownership. As a rule of thumb, don’t spend more than 20 percent of your monthly budget on a car. Factor gas, regular maintenance and car insurance into your budget.
  • Research the market. New and used cars have seen large price increases over the last few years. Compare dealerships in your area to online dealerships like Carvana to see how much you will need to borrow.

You should also calculate a potential monthly payment using your ideal annual percentage rate (APR), loan amount and preferred loan term.

2. Check your credit

Lenders prefer borrowers with good to excellent credit — a FICO score of 670 or higher. People with lower scores can qualify for auto loans. But only those with good or better credit will qualify for the most competitive rates.

Knowing your credit score will help guide you toward lenders you qualify for, helping you find the best loan for your unique situation. Certain banks, loan companies and credit card companies will offer you a free credit score check with your monthly billing statement.

Most lenders will use the FICO score, but not all. If the lender you are looking at doesn’t use FICO, ask what it does use and see if you can check it for free. This can help you avoid wasting time applying with a lender you might not qualify for, especially if it does not offer preapproval.

Review your credit report

Your credit report contains every account you’ve had in the past seven years. Your payment history, how much you owe and your current or closed accounts are all listed on your credit report.

Mistakes, like payments that were incorrectly reported as late, can impact your credit score. Review your credit report. If you find errors, report them to the credit bureau. Be sure any changes are requested 30 days or more before you apply for an auto loan. It can take up to a month for your report to be corrected.

Credit reports come from the three major credit bureaus: Equifax, Experian and TransUnion. You can request a free credit report from each of the three major credit bureaus once a year.

Optimize your accounts

Avoid taking on new debt like a credit card or personal loan. Opening a new credit account will temporarily lower your score, so hold off on any additional accounts until after your auto loan, if possible.

High credit usage also impacts your credit score. If you can help it, avoid adding to any revolving credit balances — and pay down your debts. If your score is lower than you’d like, you should prioritize making on-time payments to build your credit score before you apply for an auto loan.

3. Apply for auto loan preapproval

Many lenders offer auto loan preapproval so you can lock in your rate before you shop for your car. Preapproval gives you a set period, usually 30 days, to compare vehicles. It is an essential component of car-buying if you want to negotiate effectively at the dealership.

Overall, getting preapproved for an auto loan is similar to applying for any loan or credit card. To simplify the preapproval process, you should have common documents ready to submit. Proof of income, employment and insurance are standard. Your lender may also want to see other information.

You should compare loan offers from different lenders to get the best deal. While the interest rate is a major factor in total cost, consider fees and vehicle limitations as well. No loan is the same, so be prepared to review your loan options before you shop for your vehicle.

4. Shop for your car

Once you have preapproval — or are at least prequalified with a few lenders — it is time to shop for your car. Review negotiation strategies and check vehicle information on sites like Kelley Blue Book and Edmunds.

You must also verify that the car you want meets your lender’s standards.

Lenders may set restrictions on where you can buy your car. Some larger banks may only fund cars from dealerships in their networks. More commonly, lenders will have rules for used vehicles. Older cars, or cars with high mileage, may not qualify for financing. Generally, lenders won’t consider a car over 10 years old or with more than 100,000 miles, though some are more strict.

A lender may also limit you to buying from dealerships, not private sellers. And if you can buy from a private seller, you may face higher rates and more paperwork to complete the purchase.

5. Compare dealership offers

After you have preapproval from a lender and have found the car you want to buy, check what the dealership can offer. Dealerships work with a network of lenders to finance your vehicle. And while dealership financing tends to have higher interest rates, your finance officer may be able to beat the terms of your preapproval offer.

If they can, you could potentially score a loan with an even lower rate. If not, you already have a loan that meets your needs — and can skip dealer financing entirely.

6. Finalize your auto loan

Confirm the terms with your lender once you’ve found the right auto loan. You must send in any required paperwork, including proof of insurance, before you sign.

  • Sign the loan contract. If you agree to the terms, review and sign the loan contract. If you have a co-borrower or co-signer, they will also need to sign the contract. If you have an auto loan from a dealership, the dealer will provide the lender’s contact information on the contract.
  • Get the vehicle title and registration. You must have your vehicle title sent to the lender and the vehicle’s registration updated to your name. The dealership will usually take care of this. If not — or if you’re buying from a private seller — work with the seller and DMV to update the necessary documents.
  • Take possession of the vehicle. After you finalize your auto loan and complete the sale, you can take possession of the vehicle. While your lender will be the lienholder, you will be the official owner in charge of maintenance costs and general upkeep.

7. Start making payments

Once your loan is approved and your vehicle is purchased, you will begin making payments. Your loan agreement should have an amortization schedule that breaks down your monthly payments by interest and principal.

If your lender offers it, consider opting for automatic payments. This makes it easier to manage your loan. And in some cases, lenders may offer an autopay discount of 0.25 percent to 0.5 percent. While it may not seem significant, even a small reduction to your APR can lower the interest you pay by hundreds of dollars over the life of your auto loan.

How to get an auto loan with bad credit

Having bad credit doesn’t mean you won’t qualify for an auto loan. In fact, some lenders specialize in auto loans for bad credit. But you may face more restrictions.

You will still need to check your credit and determine your budget. But prequalifying with lenders is even more critical. Exploring potential rates and the fees lenders charge will help you pick the best loan. It will also give you more negotiating power at the dealership. Try haggling for a lower rate from one of the dealership’s partner lenders.

If you cannot qualify for a monthly payment in your budget and can hold off on buying a car, take time to improve your credit score before applying again.

The bottom line

Financing a car can be a complex process if you aren’t prepared. But by comparing top lenders and checking your rate before you shop, you can ensure you are receiving the most competitive deal.