How to Get Approved for a Car Loan

Quick Answer

Here are six steps to get approved for a car loan:

Smiling couple sitting in boot of new car at car dealership

A car is likely to be one of the biggest purchases you will make. So, before you take out a car loan, it's important to understand the car loan process.

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

Nearly 80% of new car buyers and roughly 38% of used car buyers finance their purchase, according to Experian's Q3 2023 State of the Automotive Finance Market report. The average monthly payment is $726 for new cars and $533 for used cars.

Depending on what your budget looks like, though, you may need to adjust your expectations. Take a look at your budget to get an idea of how much you can afford to spend on a monthly payment and 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.

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.

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.

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.

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.

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 focus your efforts on local credit unions and online lenders to ensure you get the best interest rate available.

  • 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.

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 score and 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.