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What to know before you apply for a car loan

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Purchasing a brand new car or used vehicle is a significant financial decision and there are some important steps you should take before hitting submit on a car loan application. By getting your ducks in a row in advance when it comes to vehicle financing you can save both money and time.

What to do before you apply for an auto loan

Prior to even stepping foot onto a vehicle dealership or diving into online buying there’s some homework you must complete ahead of time to get the best deal. This research will help you understand how much vehicle you can afford, the price of ownership and expected rates based on your credit history.

1. Set your budget

The first step is to understand how much car you can afford. Take advantage of a car loan calculator to find this number. Using one, you can calculate how much you have to pay each month to finance your new set of wheels.

Keep in mind that vehicle upkeep is more than just the monthly cost. It includes factors such as gas expenses, insurance, vehicle add-ons and any trips to the mechanic — expected or otherwise.

Car Outline
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Shop the total amount, not just the monthly cost. Focus on the entire cost you will have to pay over the course of the loan and the incidental expenses that come with owning a car.

2. Clean up your credit report

Your credit score and history will almost always serve as the primary determinant of the rates that potential lenders will offer you. These rates will influence your out-of-pocket monthly cost, and the overall cost of the loan.

While, most typically, the worse your credit score, the less competitive your rates will be, many lenders are inching away from traditional acceptance criteria and focusing on factors, such as education or job history. But either way, it is in your best interest to improve your credit ahead of applying for a loan. Pay special attention to your debt-to-income ratio which compares your monthly bills to your income.

Credit score requirements vary by each lender. But most lenders will treat drivers to more favorable rates when they have scores above 670. Applicants with scores above 740 can potentially benefit from excellent rates.

3. Shop around

As with most big purchases, you will have to take some time to explore several options in order to walk away with the best deal. Shopping around for loans is key to knowing you are receiving the best rates and terms for your loan.

When considering which lender is right for you, be sure to read the fine print and check on extra costs, such as fees or penalties. There is no single best loan for everyone, but rather one that will fit your specific needs over another.

When vehicle shopping you may also be offered financing through the dealership, which does not usually have the best rates available but could be useful in certain cases. Still, it’s better to walk in with a quote from an outside lender in hand.

How to get the best deal

Getting the best deal on your vehicle comes down to more than just the loan rate and terms you receive. There are a few key choices you can make ahead of time to walk away with extra money in your pocket.

Compare loan quotes

Shopping around for multiple quotes — keeping in mind to stay in a two-week shopping period — is the first step to finding an excellent rate. But comparing rates can be complicated.

The most effective approach is to get actual quotes from lenders rather than just going off the advertised APRs on their websites. Shoot to compare terms and interest rates from at least three different lenders.

Apply for loan preapproval

Applying for loan preapproval is one of the best ways to put yourself in control when it comes to negotiating. Preapproval gives you a firm idea of what terms and rates you can expect with a specific lender, often with only a soft credit check.

The best part: You often don’t even have to have a vehicle picked out yet, only the amount and term you want. Not every lender offers preapproval, but the added security is a huge plus, so consider looking for loans that offer this option.

Gather your documents

There are a few documents that you will need when the time to submit a loan application comes. Organize the following in advance:

  • Personal information, including your name, address, driver’s license and Social Security number.
  • Annual income, employer contact information and pay stubs.
  • Vehicle information, such as the age, mileage and VIN.

Next steps

After preparing your vehicle financing ahead of time, the fun part can begin. Use your budget and preapproval to effectively shop for your car with the same thoroughness you used to get the best auto loan.

Learn more:

Written by
Rebecca Betterton
Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ins and outs of securely borrowing money to purchase a car.
Edited by
Auto loans editor