How To Get a Car Loan: What You Need To Qualify
Written by
Greg Garrison
Edited by
Melanie Grafil
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If you’re in the market for a vehicle, chances are you’ll need to take out a loan to pay for it. Knowing how to get a car loan can help you find the best rate. You’ll walk into the dealership with confidence, knowing exactly what you can afford.
Getting a car loan can be as easy as filling out some paperwork at the dealership. You might be able to get a better interest rate or preferred loan terms from a bank, credit union or online lender. Some dealerships have multiple financing options to choose from. By doing a little research ahead of time, you can set yourself up to get the best possible auto loan for your situation.
This car loan guide will look at how to get approved quickly, where to find the best rates and what lenders look for.
How To Get a Car Loan in 8 Steps
The truth is, getting a car loan isn’t as exciting as buying a new car. However, the process isn’t as difficult or time-consuming as it might seem. Here are the key steps to secure a car loan.
1. Check Your Credit Score
Review your credit score and report to understand where you stand financially. Borrowers with credit scores above 780 will usually get the best interest rates, while borrowers with a credit score below 600 will likely receive higher rates and more limited options.
2. Set a Budget
Figure out how much you can afford to spend overall. Don’t forget to factor in monthly payments, insurance, fuel costs and maintenance. Consider how long you’re willing to make monthly payments on the vehicle and how long you intend to keep it.
Did You Know?
More than 80% of new cars and 36% of used cars are bought with the help of financing, according to data from Experian’s State of the Automotive Finance Market report for the fourth quarter of 2024.
3. Save for a Down Payment
Putting down more cash when you purchase the vehicle can often get you a lower interest rate because it reduces the risk taken on by the lender. A larger down payment will also trim your monthly payments by shrinking the overall loan amount. You may find that if you can make a large enough initial payment, you can afford to shorten the length of your loan.
4. Compare Lenders
You can get auto loans from banks, credit unions and online lenders. Car dealerships can also provide financing either through their partner lenders or through the financing divisions of the manufacturer. Just like any major purchase, it can pay off to shop around for the best loan rates and terms.
5. Get Preapproved
If you think you might want to get your car loan from an outside lender, such as a bank or credit union, you’ll need to get preapproved before you go car shopping. This typically involves providing financial information in person at a branch or online.
6. Choose a Car That Fits Your Budget
Now it’s probably time to scratch the Lamborghini off your list. The fun begins, and you can start comparing vehicles in your price range. Remember to go back and review your budget to avoid overextending your finances.
7. Apply for the Loan
Once you’ve agreed to a sale price for your vehicle, it’s time to contact your lender to finalize the loan. If you’re getting financing through the dealer, this step will be completed at the dealership as part of the purchasing process.
8. Review Loan Terms and Sign
Carefully review the loan agreement, paying close attention to the interest rate, loan term, and monthly payment details. Make sure all terms are favorable and that you fully understand your financial obligations before signing.
Where To Get a Car Loan
Banks, credit unions and online lenders all offer auto loans. Car dealerships also provide several financing options that can be fast and convenient. Even if you think you’ll be financing your car purchase through the dealership, it can pay off to check rates from outside lenders and get preapproved for a loan before you buy a car.
Here’s a closer look at your financing options and the advantages and drawbacks of each.
Banks
Banks are a popular source for auto loans, and they can be the best option for many borrowers. You can often find low interest rates and flexible auto loan terms at a bank. However, their loan approval criteria can be stricter, requiring higher credit scores and stable income. If you have a good financial profile, this could be a great choice for securing lower monthly payments.
You’ll need to get preapproved by the bank for a car loan before you purchase the vehicle.
Credit Unions
Similar to banks, credit unions can provide low rates and flexible terms on car loans. You’ll need to become a member to take advantage of their offers, but many credit unions these days have relatively easy membership requirements.
Online Lenders
Many online lenders can provide you with a car loan, and most offer a quick and easy application process. Online lenders often have less strict qualification requirements, so those with lower credit scores may have a better chance of approval. However, online lenders may charge higher fees and the interest rates might not be as low as you’d find elsewhere.
Dealership Financing
Many auto dealerships have a list of partner lenders they work with to help customers finance their purchases. After you’ve selected a vehicle and agreed upon a price, the dealer will collect financial information such as your credit score and proof of income and send that to its lenders. In many cases, you’ll be able to compare several loan rates to choose the one that’s right for you.
Financing your car through a dealership has several benefits. Your loan will likely be approved faster, and the dealer handles much of the paperwork. This saves you the time you might have spent reaching out to multiple banks and waiting for loan decisions. However, some dealers have set rates or limited flexibility on loan terms, and you may end up with higher rates than you would with a bank or credit union.
Manufacturer Financing
Another type of loan you can get through a car dealership is from the manufacturer itself. Many car companies have financing arms that were created to help them sell more vehicles. Toyota Financial Services and Ford Credit are two examples of lending divisions owned by car brands.
Manufacturers frequently run promotional deals, such as a 0% annual percentage rate or cash back, on specific models they’re trying to sell. If you see a special rate or deal on the car you want, this will likely be the best financing option for you.
What Do You Need to Get Approved?
Some lenders have stricter approval requirements than others, but they all want to assess how much risk they’d be taking on by giving you a car loan. Here are some of the things you’ll need to get your auto loan approved.
- Good credit score: Your credit score will determine not only whether you qualify for a loan, but also how good of an interest rate you receive. Borrowers with credit scores that fall into the highest “super-prime” range of 781 to 850 will likely get the best rates, while those with credit scores below 600 may not get approved by some lenders.
- Proof of income: Lenders want to see that you have a reliable stream of cash coming in so that you can make on-time payments.
- Personal identification: You’ll need to provide the lender with a driver’s license or government-issued ID.
- Down payment: This isn’t always required, but it can improve your approval chances, especially for vehicles with higher purchase prices. A down payment will also help reduce your monthly payments.
How To Get the Best Interest Rate
Auto loan interest rates vary significantly, but there are several effective ways to get the best possible rate on your car loan.
Improve Your Credit Score
Your credit score may be the single biggest factor in determining the interest rate on your car loan. Consider that the average interest rate on a new car loan for borrowers with credit scores above 780 was 4.77% APR, according to the most recent Experian data. For those with credit scores between 661 and 780, the rate jumped to 6.40% APR. Borrowers with scores below 500 paid an interest rate of 15.75% APR.
While improving your credit score isn’t easy, it can pay off significantly by helping to reduce your monthly payments. Paying off debts and avoiding late payments are two ways you can steadily build up your score.
Make a Larger Down Payment
By putting down more money at the time of purchase, you reduce the overall size of the loan and, therefore, the amount of risk to the lender. This can result in you getting a better rate on the smaller remaining loan total.
Choose a Shorter Loan Term
While longer loan terms might make your monthly payments more manageable, shorter loan terms often come with lower interest rates. Shorter terms pose less risk to lenders because the loan gets paid off more quickly, with less time for the borrower to run into financial challenges.
The average interest rate for new loans with terms of 48 months or less was 3.39% APR, while the rate for terms of longer than 85 months was 8.83% APR, the Experian report found.
Shop Around
Here’s one step you can take regardless of your financial profile: shop around and compare rates. Get estimates from several banks, credit unions and online lenders. Look for manufacturer financing deals at multiple car brands. Getting preapprovals from outside lenders may even help you negotiate a better rate with the dealership.
Pros and Cons of Financing a Car
| Pros | Cons |
|---|---|
| Enables you to buy without paying in full | Interest adds to the overall cost |
| On-time payments build credit | Late payments hurt your credit score |
| Offers flexible terms to fit your budget | Longer loans can leave you owning more than the car’s value |
Final Take: How To Get the Best Car Loan
Ultimately, to give yourself the chance of getting the best car loan rates, you’ll want to shop around and know where your credit stands — is it good or does it need improvement? Having a plan before you walk into the dealership will set you on the right track.
FAQs on How To Get a Car Loan
If you have questions about getting a car loan, here are some of the answers.- What credit score do I need to get a car loan?
- While requirements vary between lenders, borrowers with credit scores of at least 600 will have a better chance of getting approved for a car loan.
- Can I get a car loan with bad credit?
- Yes, it is possible to get a car loan with bad or no credit. However, you'll have limited options, and those loans will likely come with a high interest rate and less preferable terms. "Buy here, pay here" loans are offered by some car dealerships and are designed for customers with bad or no credit. With these loans, you may have to pay more frequent installments than the usual monthly payments.
- How much should I put down on a car loan?
- It's typically recommended to put down at least 20% on a new car purchase. However, if you can put down more, you may want to ask your lender whether a larger down payment would result in a lower interest rate.
- How long does car loan approval take?
- The time it takes to get approved for a car loan depends on the lender you're working with. Banks and credit unions may take one to three business days to review your application, while dealership financing can be completed in several hours.
- Can I refinance my car loan later for a better rate?
- Yes, you can refinance your car loan to get a better rate. This involves obtaining a new loan to replace the existing one. Refinancing your car loan may be a good idea if interest rates have dropped or if your credit score has improved.
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- Experian. 2024. "Average Car Loan Interest Rates by Credit Score."
