Car loans allow you to borrow a lump sum of money to buy a vehicle now, then repay the loan over time. Because a car is likely to be among one of the biggest purchases you make, knowing how to secure financing is key.
While you can speed up the process by having the dealer arrange financing on your behalf, you may be able to get a better interest rate if you apply on your own and get preapproved before you head to the dealership. Here are six steps to help you get a car loan.
1. Determine Your Budget
Over 80% of new car buyers and roughly 36% of used car buyers finance their purchase, according to Experian's Q2 2024 State of the Automotive Finance Market report. The average monthly payment is $734 for new cars and $525 for used cars.
Depending on what your budget looks like, though, you may need to adjust your expectations. Some experts suggest spending no more than 10% of your monthly income on transportation costs. Be sure to factor in not just your monthly payments, but the other ongoing costs of ownership, including:
- Insurance premiums
- Fuel or electricity
- Maintenance
- Repairs
You'll also need to look at other monthly debt obligations you may have, such as credit cards, student loans and a mortgage. Auto lenders typically like to see a debt-to-income ratio—the percentage of your gross monthly income that goes toward debt payments—below 50%, but the lower it is, the better.
Learn more >> Buying a Car: How Much Can You Afford?
2. Check Your Credit Score
Your credit score is a crucial factor in determining your eligibility for an auto loan, as well as the terms you qualify for. You can check your FICO® Score☉ for free with Experian to get an idea of where you stand. Here's a quick summary of the different FICO® Score ranges:
- Exceptional: 800 to 850
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
Note, however, that the credit score you see may be different from the one the lender uses. In particular, many auto lenders use the FICO Auto Score, which has a score range between 250 and 900. However, your base FICO® Score can still help you gauge your creditworthiness.
Learn more >> What Credit Score Is Used for Auto Loans?
What Credit Score Do I Need for a Car Loan?
There's technically no general minimum credit score requirement to get approved for an auto loan—some lenders even specialize in working with bad-credit borrowers.
That said, individual lenders will have minimum creditworthiness criteria, and if your score is in the fair or poor range, you'll likely end up with a steep interest rate and monthly payment.
Learn more >> What Auto Loan Rate Can You Qualify for Based on Your Credit Score?
3. Compare Auto Loans
Once you've assessed your credit health, you can shop around and compare auto loan offers from lenders. Many lenders offer a prequalification tool that allows you to get an idea of what your loan terms might look like without impacting your credit score. In addition to interest rates, you may also consider repayment terms, prepayment penalties and other terms.
Some options to consider include:
- Banks: If you have an existing relationship with a bank, check to see if you qualify for a relationship discount.
- Credit unions: Credit unions often offer lower interest rates than traditional banks, but you must be a member to get approved for a loan. In some cases, you can join during the application process.
- Online lenders: Online lenders are more likely to allow prequalification, and some marketplace websites even make it possible to get quotes from multiple lenders with just a single online form. Interest rates can also be comparable with credit union rates.
If you submit an official application to more than one lender, try to do it in a short period of time to minimize the impact on your credit score.
Learn more >> How to Get the Best Car Loan
4. Get Preapproved for a Car Loan
Getting preapproval for a car loan involves completing a preliminary application with a lender who will review your credit and other financial information. They'll let you know the size of the loan they'll finance and the interest rate they're likely to offer.
Unlike prequalification, however, preapproval will typically involve a hard inquiry, which can impact your credit. At the same time, preapproval can make it easier for you to find the best interest rate because the decision is based on more complete information. Some of the details you may need to provide include:
- Full name
- Social Security number
- Date of birth
- Address
- Contact information
- Vehicle make and model
- Desired loan amount
Note, however, that preapproval doesn't obligate you or the lender to actually enter into a loan agreement.
5. Visit One or More Dealerships
Once you've been preapproved, take some time researching dealers in your area to compare sales prices. This information can make it easier to negotiate the price and ensure you get the best deal.
With your preapproval in hand, you can also minimize the discussion about financing, which is often the most time-consuming aspect of the process. Plus, preapproval gives you a hard price cap, which could give you additional leverage.
Learn more >> How to Negotiate a Car Price
6. Finalize the Loan
After you reach an agreement with the dealer, reach out to your lender to finalize the loan terms. You may need to provide some additional documentation at this point, including:
- Proof of income
- Proof of residence
- Proof of insurance
- The vehicle purchase agreement
If you're approved, you'll receive a loan agreement detailing the terms and conditions of the contract. Review the agreement carefully, then sign it to complete the process. Note your first payment due date and set up automatic payments before then.
Frequently Asked Questions
Yes, it's possible to obtain a car loan to make a private-party vehicle purchase. Keep in mind, though, that some lenders may not offer private-party loans and may only work with a network of approved dealerships.
Ultimately, the best place to get a car loan is the lender that offers the best terms based on your credit profile. It can make sense to work with a bank if you qualify for a relationship discount, but you should also consider local credit unions and online lenders to ensure you get the best interest rate available.
Dealer-arranged financing may seem like a convenient option, but you're likely to find better rates if you look elsewhere first. Dealers may try to negotiate based on the monthly payment instead of the total amount—longer repayment terms yield lower payments but result in higher interest charges. Having a loan preapproval from a bank or credit union can give you more information and leverage to use in negotiations if the dealer offers financing.
It's possible to get a car loan with bad credit. That said, if your vehicle purchase isn't urgent, consider taking steps to improve your credit before applying for an auto loan. If you can't wait, your options will be limited, so be sure to shop around and compare loan options from multiple lenders—and, if possible, avoid buy here, pay here dealerships.
While you'll likely end up with a high interest rate, you can offset the impact of poor credit by making a bigger down payment. You could also ask a loved one with good credit to cosign your car loan application. Just be sure that they understand how cosigning can impact their credit.
Getting preapproved for an auto loan has the potential to hurt your credit. For example, if you go through the preapproval process with the lender and submit all of your information and documentation, the application will typically result in a hard inquiry, which can have a small, temporary impact on your credit score.
On the other hand, if a lender sends you a preapproval offer in the mail, it made its decision based on a soft credit check, which won't impact your credit. Also, keep in mind that preapproval is not the same as prequalification. If a lender offers a prequalification tool, it typically requires little personal information, doesn't impact your credit score and will give you a more general amount for which you may qualify.
Make an Informed Decision
A car loan can be a great way to purchase a vehicle while building your credit at the same time. But even if you need a new car yesterday, it's important to take your time to shop around for the best loan deal and understand all the terms and conditions before you sign for a loan.
If your credit needs some work and your vehicle situation isn't urgent, review your credit report for free and make improvements based on what you find.
Once you know your credit standing and what you need to do to improve it, you'll become better informed about your options and next steps.