In this article:
To qualify for a car loan, there are a few different factors you need to consider. While having good credit can help, there are other criteria that lenders consider when determining whether to approve your application. Here's what you need to know.
Make Sure You Have Good Credit
Having a good credit score is essential if you want to get approved for an auto loan with decent terms. In general, a good FICO® Score☉ ranges from 670 to 739, and a higher score is even better.
Auto lenders typically use the FICO 8 or FICO Auto Score models to determine your score. Keep in mind, though, that lenders may have their own rubric for determining what they consider to be good or not. But if your credit score is at least in the good range, you'll have a relatively good chance of getting approved.
Also, note that lenders may choose to approve you for a car loan even if you have a less-than-ideal credit score. But they may charge you a higher interest rate or require a cosigner with strong, established credit. Some lenders specialize in working with people who have bad credit scores, but these loans can be expensive, so it's a good idea to work on improving your score before you apply.
Have a Source of Income
Having a steady income is important to auto lenders because it improves the likelihood that you'll make your monthly payments. Depending on the lender and your job situation, you may need to provide one or more forms of documentation.
If you're a W-2 employee, for instance, a recent pay stub or a W-2 form may suffice. If you're self-employed or receive Social Security or other similar forms of income, however, you may need to provide bank statements.
Speak with the lender early on in the process to talk about your situation and find out what documents you need to avoid prolonging the process.
Be Able to Prove Your Identity and Residence
If you're getting a loan from the bank or credit union you use regularly, you may not need to provide this information. If you're working with a lender for the first time, however, you may need to provide a government-issued ID and proof of residence.
This is primarily because the lender wants to know where the car will be parked in case you default on payments and it needs to repossess the vehicle.
Again, requirements can vary by lender, but in general, a driver's license or other government-issued ID with your current address can satisfy both. If you don't have that, you can also provide a utility bill, lease agreement or bank statement with your address on it to prove your residence.
Consider Getting Preapproved
The auto loan preapproval process allows a lender to run a soft credit check and review your credit report to determine what your chances are of getting approved and what interest rate and other terms you might qualify for. If a lender doesn't preapprove you, then you know not to waste your time applying.
Because it's a soft credit check, getting preapproved won't hurt your credit score. If you go through the process with multiple lenders, it also gives you an opportunity to compare different lenders to see which one will give you the best loan terms.
Keep in mind, though, that not all auto lenders offer preapproval. Also, some may require that you have a specific car in mind, while others don't.
Have a Down Payment or Trade-In
Making a down payment or trading in your current car reduces how much you have to borrow and can make it easier to get approved at a lower interest rate. Here's what you need to know about each option.
A down payment is cash that you give to the dealer or seller to help cover a portion of the sales price of the vehicle. Lenders tend to view borrowers with down payments more favorably because it means they have skin in the game and are less likely to default.
Because a down payment reduces how much you have to borrow, it also lowers your monthly payment and the total amount you pay in interest.
A trade-in is any vehicle with value that you offer a dealer in exchange for credit to go toward the sales price of the car you're buying. For example, if you're buying a $15,000 car and trade in your current car for $8,000, you only need to borrow $7,000 on the new vehicle—that is, if you don't have a loan on the original car that you need to pay off.
If you owe more on the car than what the dealer offers for trading it in, you have what's called negative equity, and you'll need to pay the difference immediately to your lender upon the sale of the car.
Trading in a car is convenient, but you typically won't get as much from the sale than if you sell it to a private party. If you don't have time to sell the car on your own, though, and you don't have negative equity, the convenience may be worth it.
Understand How Financing at a Dealer Works
If you're working with a dealer, it's important to understand how they handle the financing process. With many dealers, they reach out to multiple lenders at once to get quotes that they can share with you. Be sure to ask to view all the quotes instead of just the one the dealer recommends.
Some dealers may even offer special financing programs to borrowers that are sponsored by the car's manufacturer. These deals typically require that you have excellent credit and agree to specific terms.
Qualifying for a Car Loan With Bad Credit
You don't need good credit to get a car loan. In fact, there are several auto lenders that specialize in working with borrowers with bad credit.
To get an auto loan with bad credit, take your time shopping around to find lenders that offer preapproval and can give you relatively decent terms. Also, try to have a good down payment or trade-in value to help reduce the amount you need to borrow.
Finally, consider getting a cosigner who has great credit and can help you qualify for a better auto loan. Just keep in mind that your cosigner is equally responsible for paying off the loan if you default, so it can ruin both your credit histories if you're not careful.
Work on Your Credit Before Applying
The better your credit situation, the higher your chances of getting approved for an auto loan with excellent terms. If you don't need a new car quite yet, check your credit score to see where you stand, then focus on areas where you can improve.
For example, get caught up on any past-due payments and work on paying down credit card balances. Also, check your credit report for potential inaccuracies that you can dispute with the credit reporting agencies. Improving your credit can take time, but it's well worth it if it can save you money.