How to get a car loan in 8 steps

Email address

By clicking ‘Sign up’, you agree to receive marketing emails from Insider as well as other partner offers and accept our Terms of Service and Privacy Policy

If you’re shopping for a car, you’ll probably also need a car loan. 

Getting a loan for your new or used car purchase may sound daunting, but it’s not hard. Follow these eight steps to make sure that you’re getting the best deal on your future car’s financing. 

Financing can be arranged either on your own or through a dealership. While dealership financing can be the simplest way to get your car financed, it isn’t always the cheapest. Make sure to shop around with other lenders to know what interest rates you’re eligible for based on your credit and financial circumstances. 

1. Check your credit

Your first step should be checking your credit report and credit score. Your credit score is a number on a scale ranging from 300 to 850 that looks at your borrowing history to tell lenders how likely you are to repay what you borrow.

If you need to access your credit report, you can get it at no cost from any of the three major credit bureaus on weekly through April 20, 2022. This report will give you information about your payment and credit history — though it won’t provide you with your credit score. Looking over your credit report can help you spot errors and find areas for improvement.

You can get your score for free on your credit card statement or online trương mục. You can also buy it from a credit reporting agency.

Your credit score will have a big impact on the interest rate of your loan. There’s no minimum credit score needed to buy a car, but the best rates go to borrowers with credit scores above 660. Knowing your credit score up front can help you tailor your lender search to your specific situation, and avoid any surprises as you start shopping.

2. Determine how much to borrow and what you can afford

You should know what type of car you’re aiming to buy when looking for your loan. You’ll also want to consider the following factors:

  • The monthly payment. How much can you afford to pay each month?
  • How much you can put down. The rule of thumb is a 20% down payment on a car. The more money you can put down up front, the smaller the monthly payment will be. 
  • How long of a loan you’ll need. Longer loans may reduce the amount you owe each month, but they could cause you to be “upside down” on your loan, a situation where the amount due on your loan is greater than the car’s value. Cars are notorious for depreciation, or losing significant value over time. Choose a loan that’s 60 months or shorter to avoid an upside-down loan. If your loan is too long, consider choosing a less expensive car, making a larger down payment, or paying more each month. 

3. Choose a few lenders you like

Once you know how much you can afford and your credit score, start looking for a lender. A few options include:

  • Credit unions. These local institutions often offer low interest rates than large banks. You’ll have to become a member, and membership is usually bound to things like geographic location or an employer. 
  • Banks. Most banks also give loans like auto loans. Banks you already have a relationship with may offer you affordable rates. However, many larger banks’ auto loans generally start with a higher interest rate than credit unions. 
  • Online lenders. A number of online-only banks and lenders offer car loans. While they can sometimes offer lower rates due to the fact that they don’t have any overhead costs, there’s no brick-and-mortar office to visit.

4. Get pre-approved through those lenders

Once you’ve picked a few lenders, start applying for pre-approvals. A pre-approval is a bank’s way of conditionally saying that they’re willing to lend to you. You can get pre-approved by as many lenders as you’d like — you’ll want to check with a few lenders to compare the interest rates they offer.

Dealerships can also help you arrange financing, but it’s worth shopping around beforehand. It’s common practice for dealerships to mark up financing rates, so looking at different lenders could help you be sure that the dealership’s offer is the best deal. 

5. Compare your pre-approval offers

Once you start getting pre-approvals, you’ll have 14 days to gather as many as you’d like without having multiple hard credit inquiries appear on your credit report — they’ll all appear as one. A hard inquiry gives a lender a complete view of your credit history, but might negatively affect your credit score.

Pre-approvals are generally good for 30 or 60 days, depending on the lender. Compare your pre-approval offers to find the offer that best fits your monthly budget, carries the lowest APR, and has the shortest term. 

6. Accept an offer

Now you’ll accept the loan offer that you’re happy with. Make sure you have the proper documentation on hand, like your driver’s license, proof of income, proof of insurance, and proof of residency, depending on the lender. You’ll also want to bring the pre-approval paperwork and your checkbook if you’re making a down payment. The bank will then arrange for the funds or a blank check to be sent to you or the dealership, and you’re ready to buy the car.

7. Head to the dealership

This is the fun part: Pick out the car. Then, you’ll sign some paperwork at the dealership. Oftentimes, the lender you choose will send you a blank check, and you’ll fill it out once you and the dealer have settled on a price. You’ll make your down payment at this point, too.

After you’ve left the lot, the lender will send you information on how much you owe and how to pay. 

8. Automate your payments 

Many lenders offer a small interest rate discount when you sign up for an automatic payment. When you set up automatic payments, funds will be automatically deducted from your bank accounts on a monthly date you choose.

Autopay can be set up through your lender online or over the phone. Many lenders will let you know about rate discounts before and as you apply on their websites, or through the paperwork sent to you after finalizing your loan.

Buying a car is a big decision, but you can make sure you get the best terms possible by shopping around and prequalifying with different lenders.