How to get a car loan in 7 steps, including preapproval (2024)

If you need to finance your car purchase, you aren’t alone — 79.3% of all new cars were financed in 2023 (compared to 37.8% of used vehicles), according to Experian. The good news is that getting a car loan is typically a straightforward process.

Start by evaluating your credit and determining a reasonable car-shopping budget. Before shopping for your next set of wheels, get preapproved with banks, credit unions and online lenders to find the loan that best fits your needs. Be prepared to provide documentation to verify your income, employment, residency and debt.

We’ll explore the step-by-step process for how to get a car loan so you can visit the dealership with confidence.

1. Check your credit

Your credit profile plays a key role in whether you’ll qualify for car loans and the rates you’ll receive. However, improving your credit scores can take several months or more, so you’ll want to check your credit reports and scores before you plan to buy a car.

“Run your credit report three months before you plan on buying,” said Joseph Yoon, Edmunds’ consumer insights analyst. “This will help you identify any potential risk factors [old debt, unpaid fines] in your history so that you can potentially fix them before you seek out a loan.”

Your credit reports provide a snapshot of your credit situation over the past seven to ten years, including payment history, open accounts and negative events like bankruptcy or collections actions. Lenders use this information to decide whether to lend you money. You can pull all three of your credit reports for free at AnnualCreditReport.com.

While not found on your credit reports, your credit scores condense that information into a three-digit number — the higher your scores, the less risky you appear to lenders. Start by checking your credit scores via your bank, credit union or credit card issuer. If you don’t have free access through your financial institution, you can pay to get them from a third-party service. And if your scores need some work, you can give them a boost by paying off debt, making all payments on time and avoiding new credit applications.

Related >> What factors affect your credit scores?

Auto loan rates by credit score

You don’t necessarily need good credit scores to qualify for an auto loan, but the higher your scores are, the lower your auto loan rates will be. The difference of one or two percentage points might not seem like much, but it can make a significant impact on the cost of borrowing money, especially in today’s market, where the average rate on five-year car loans was approaching 8.5% in February 2024, according to the Federal Reserve.

“Interest rates are incredibly important to consider when choosing a car loan since they will determine your monthly payment, and ultimately, the total cost of the vehicle,” said Joe Pendergast, vice president of consumer lending at Navy Federal Credit Union.

Here’s a look at what you can expect for auto loan rates by credit score:

Example: Let’s say you took out a $30,000 car loan with a five-year repayment term. By qualifying for a loan with a 6% APR instead of 8%, you’d save $1,698 on overall interest charges and $28 each month.

Can I get an auto loan with bad credit?

Yes, some reputable lenders offer auto loans for bad credit, but your rates will be high and you may not be approved for the amount you want. Avoid “buy-here, pay-here” car lots (with their guaranteed loans), which are likely to charge predatory interest rates and have loan terms that can trap you in a cycle of debt.

If your scores aren’t high enough to qualify for the loan you want (or any loan at all), there are better options to consider. For starters, look for a credit union that offers first-time car buyer loans or other car financing with flexible credit score requirements. This can also help you save money since credit unions often have lower interest rates than other lenders — the average rate for a five-year auto loan on a new car was 6.40%, versus 7.21% for the same loan at a bank, according to March 29 data via the National Credit Union Administration.

But there are ways to improve your chances of being approved, regardless of where you apply.

“If you’re looking for an auto loan in the immediate future but have poor credit, having a cosigner vouch for you is a great way to help qualify,” said Pendergast. “Especially for students or individuals who don’t have an income, cosigners are a smart choice to help navigate the process of getting an auto loan.”

If you have bad credit, consider these strategies to qualify for a car loan:

• Apply with a creditworthy cosigner or co-borrower
• Review your credit reports and dispute errors that could be hurting your scores
• Increase your down payment amount
• Apply for a smaller loan

“For shoppers with less-than-stellar credit, the focus should be on increasing the down payment to reduce the total amount borrowed on the loan,” added Yoon.

2. Determine your budget

Just because an auto lender approves you to borrow a certain amount doesn’t mean you can truly afford it. While lenders review your financial information to determine whether you qualify for a loan, they don’t see the full picture.

And following expert advice to the letter may not always be possible. For example, some experts recommend the 20/4/10 rule, which advises you to make a 20% down payment, choose a maximum repayment term of four years and spend no more than 10% of your take-home pay on car-related costs, including the loan payment. But given how pricey vehicles are these days, most buyers have to be flexible in at least one of these guidelines.

The bottom line is that, as the buyer, you’re the only one who can examine your budget and assess how much room you have for auto expenses. When you’re crunching the numbers, remember to keep all the costs of car buying and ownership in mind, including:

• Down payment
• Monthly loan dues
• Sales tax
• Annual registration
• Routine maintenance and repairs
• Car insurance
• Fuel or electricity

The average cost of owning and operating a new car was $12,182 ($1,015 a month) in 2023, according to AAA, but your expenses vary depending on factors like your…

• City’s cost of gas
• Vehicle’s fuel efficiency
• Level of insurance coverage
• State’s vehicle registration costs

3. Gather your financial information

You’ll need to provide the lender with information about your credit history, outstanding debt, income and employment to apply for an auto loan. Most lenders request the following information and documents at some point in the application process:

• Social Security number or ITIN
• Email address
• Driver’s license
• Proof of insurance
• Proof of residence
• Employment details (including pay stubs or a W-2)

4. Get preapproved with multiple lenders

A common mistake buyers make is to shop around for cars but not for auto loan rates.

“It’s not unreasonable to assume that car payments are the second largest monthly expenditure in many consumer’s budgets, and if you’re going to commit this much money for five, six, seven or even eight years, it’s critical to look beyond the dealership’s first financing offer and see what alternatives may be available,” said Yoon.

The best way to comparison shop is to get an auto loan preapproval from multiple lenders, including banks, credit unions, online lenders and your current financial institution. While not a final approval guarantee, these quotes are firm offers based on a review of your credit and financial information. They help you understand your eligibility and future interest rate.

Each preapproval involves a hard credit inquiry, which can drop your credit scores by about five points, according to FICO. Preapproval can also reduce your hard inquiries by narrowing your search and helping you apply for fewer loans. But if you limit your preapproval applications to a two-week period, the credit bureaus will bundle the inquiries into a single “rate-shopping” credit pull.

5. Compare loan offers

When reviewing loan offers, consider each annual percentage rate (APR), not the simple interest rate — APR includes both the rate and applicable fees and gives a more accurate picture of the loan’s annual cost. The lower your APR, the less your loan will cost.

Repayment terms play a huge role in your borrowing expenses since a longer term reduces your monthly payment but increases your overall interest charges. Experts generally recommend selecting the shortest repayment term you can afford. (Plus, shorter terms tend to have lower APRs, helping you save money.)

Review the following details so you can determine which offer best fits your needs:

• Loan amount
• Monthly payment
• APR
• Length of repayment
• Application or origination fee
• Late fees
• Potential prepayment penalty

Example: Let’s say you’ve narrowed your search to the following three offers for a $30,000 loan:

If you can afford the higher monthly payment, Loan 1 offers the greatest interest savings over time — you’ll pay $4,807 less in interest than with the third loan. Use an auto loan calculator (like Calculator.net’s) to understand how each loan offer fits into your budget.

Also determine whether there are limitations on where you can use the loan, how long the preapproval offer lasts and the type of car you can buy. For example, the lender may restrict you to their in-network dealerships, prohibit private sales or have limitations on the vehicle’s mileage.

6. Find the right car for your budget

Now comes the fun part — finding your dream vehicle. Even if you’re limited to a certain dealer network or lender, use all the tools available to find the best car in their inventory.

Here are a few ways you can find a good deal:

• See if your lender offers a car-buying service or other programs/discounts for buyers.
• Make a list of the most important car features and avoid other costly non-necessities.
• Use industry guides like Kelley Blue Book or Edmunds to research fair car prices.
• Use online dealer inventories to expand your search.
• If you have a trade-in, get it appraised by an independent appraiser before accepting an offer. (Try searching for “auto appraisers near me.”)

Ask the dealer to beat your lowest rate

Your preapproval offer can be a great tool for negotiating. Before sealing the deal on a new (or new-to-you) vehicle, ask the dealer’s financing department if they can give you a lower APR without extending your loan term. Watch for hidden fees or add-ons, and review their counteroffer carefully to ensure it’s truly more affordable than your in-hand offer.

7. Finalize your loan

Once you’ve chosen your car, work with your lender (or the dealer) to finalize the loan. Be prepared to provide requested documents, including the vehicle purchase agreement and proof of auto insurance.

After you review and sign the loan contract, your lender will arrange funding with the dealer. If you’re buying a car from a private party, the lender may disburse funds to you or directly to the seller.

Frequently asked questions (FAQs)