How to Get a Car Loan

If you're planning to buy a new or used car in the near future and have never before financed a vehicle, you may be wondering how to get a car loan. But even if you have experience with auto loans, you may be wondering how to get the best possible rate or how to get a car loan on another vehicle. 

To ensure you get your loan easily and at a competitive interest rate, you must understand your different options and how financing works. By preparing ahead of time, you'll have the knowledge necessary to proceed with confidence. You should also make sure to work with a local independent insurance agent to get set up with an affordable car insurance policy.

Step 1: Determine Your Auto Loan Budget

If you've been wondering how to get an auto loan or the best way to finance a car, the first step is to determine your auto loan budget. When calculating your auto loan budget, you'll also want to keep in mind not only the purchase price of the vehicle itself, but also maintenance costs, fuel costs, and car insurance, which should all be factored into the total amount you'll be spending. Once you have an estimate of this amount, you'll need to evaluate your current and future financial status. Review how much you make and if your income will remain consistent in the coming months and years, and account for any changes you can anticipate now.

Lenders will evaluate several factors when determining whether or not to loan someone money for a new or used vehicle. They'll review your credit score and overall credit history, as well as your current income and outstanding debt. Lenders will also evaluate the amount of the loan you're requesting and the loan term or the amount of time you'd be paying it back for. They'll also consider the type and condition of the vehicle you want to finance and whether they can determine if you'll successfully be able to pay off the loan under your circumstances.

Step 2: Check Your Credit Report

Before further researching how to get an auto loan, check your credit report. If you've been asking, "What do you need to finance a car?" one major factor is a good credit score. Your credit score will not only factor into determining the overall amount of financing you can receive for a vehicle but also the interest rate you'll be given. The higher your credit score, the lower your interest rate will be, and the more money you'll likely be offered through an auto loan. 

Knowing your credit score before you apply for an auto loan can give you a better idea of what to expect and even allow you time to make changes to improve it before you start applying. You can even request a free copy of your credit report once per year from three major reporting bureaus online. If you have a good or excellent credit score of 661 or higher, you can expect to get a higher loan with a lower interest rate. But if your credit score is fair or poor, as in 660 or lower, you might get a lower loan with a higher interest rate or even be denied a loan. Another thing to keep in mind is that it's possible to rebuild your credit with an auto loan.

Step 3: Research Auto Loan Lenders

When it comes to how to get a car loan, know that there are four ways to obtain loans. Having options can make things easier for you when considering how to finance a car. If you've never taken out an auto loan before, researching your options ahead of time may help increase confidence or peace of mind when you start shopping.

Auto loans are available from different financial institutions, including banks, credit unions, and online lenders, and even through auto dealerships. Where you ultimately choose to get your auto loan should make sense for you and your financial circumstances. Look into these different types of auto loan lenders when shopping around for your ideal car loan.

Financing a Car through a Bank or Credit Union

Nearly all banks and credit unions offer a variety of loan options for their customers who qualify. Financial institutions offer loans for your vehicle before you've purchased it. That way, you can factor the cost of the loan and possible interest into your overall budget before you buy the car. Secure your car loan from a bank or credit union and then use that amount to purchase your new or used vehicle from a dealership.

If you've been wondering how to get an auto loan, the best way to finance a car for you might be to go through a bank or credit union. With the convenience of knowing your loan amount before getting your vehicle, these institutions might provide the best financial strategy for many folks. Knowing your loan amount upfront can help you stick to only the vehicle options that fit safely within your budget when you go car shopping.

Financing a Car through the Dealership

Car dealerships also offer financing for vehicles you buy through them. Dealerships may sell the loan to a bank or credit union, or they may keep it. Typically, car buyers can secure auto loans more easily through a dealership than through a bank or other financial institution. A dealership's auto loan option can be highly convenient and offer less red tape to have to go through, making the process faster.

If you've been wondering how to get an auto loan, the best way to finance a car for you might be to go through the dealership where you purchase your car. A salesperson at the dealership will need your driver's license and Social Security number to run a credit check and provide your auto financing options, and this can all be done while you wait. You can compare your loan options from the dealership with any loans you might have been pre-qualified for by your bank.

If the rate offered by the dealership is only slightly higher (i.e., about one-tenth of a percentage point), it may be worth it to go with the dealership’s offer, as your paperwork will not be as cumbersome. If the difference is significant, however, you can let the dealership know you'd rather finance your vehicle loan through your financial institution. The dealership will help you by providing you with the required forms your bank needs to complete the loan.

Financing a Car Online

You can also find a number of different auto loan options online. You can often secure quotes for many different types of auto loans from various auto lenders on one website. Overall, auto loans secured through online lenders operate very similarly to how auto loans from banks and credit unions do.

If you've been wondering how to get an auto loan, the best way to finance a car might be to go online. Online lenders provide ease and convenience for many folks in need of an auto loan. Just make sure to take enough time to carefully compare and weigh your options for overall loan amounts and interest rates.

Financing a Car from a Used Car Lot

Used car lots frequently have lower-priced, lower-quality vehicles than you will find in the pre-owned section of a new car dealership. For some, this is the best way to finance a car, not only because the cars are more affordable but also because financing is easier to get. We’ve all seen lots featuring signs that say, “No Credit? No Problem!” or “We Finance Everyone!”

While this may seem like a fantastic deal for someone with a poor credit history, it does come at a price. Typically, the car financing offered to those with bad credit will have an extremely high interest rate. As a result, you will end up paying significantly more money for your vehicle than the sticker price.

Consider this: If three people, each with different credit ratings (e.g., good, fair, and poor), were to purchase a $5,000 used car on a three-year financing plan, each would end up paying a different total amount. The list below illustrates the total expected payments based on average auto loan financing rates that are available today. These rates are subject to change at any time and can vary from one place to another, so you should not use them as a basis for what your rate will be.

$5,000 used car on a three-year financing plan:

• Good credit: 4.85% interest rate loan, total payments: $5,383
• Fair credit: 11.5% interest rate loan, total payments: $5,936
• Poor credit: 18% interest rate loan, total payments: $6,507

If you have bad credit and desperately need to buy a car, financing one at a high-interest rate may be your only option. However, if you can qualify for a lower rate on a bank loan or can hold off on buying a car while you save up for one or work on improving your credit, you can save yourself a lot of money. Ultimately, a used car lot just might be the answer to your question of how to get an auto loan. 

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Step 4: Get Preapproved for a Car Loan 

Getting preapproved through your bank or a credit union when shopping for a car loan can provide a lot of convenience and other benefits. You'll complete an application through a lender to get your credit checked and your financial status evaluated. Afterward, the financial institution generates a report for you with the breakdown of your preapproved loan amount and the interest rate and loan term.

If you've been wondering how to apply for a car loan, how to apply for an auto loan, or asking, "What do you need to finance a car?", a preapproved loan from a bank or credit union can provide a great solution for many folks. Some of the benefits of getting preapproved for an auto loan include securing a better interest rate and leveraging bargaining power with your auto dealership. Also, even if you get preapproved for a loan, you're not obligated to sign a loan agreement with that lender.

Step 5: Shop for Your Car

Obviously, this is the most exciting step of the process: actually shopping for your new vehicle. With the preapproved loan amount in mind as the maximum amount of budget you have to spend on your car (keeping in mind that taxes are also a factor), it's time to start shopping. However, before you head out the door, note that it's wise to do some research before you ever step foot on a dealership lot.

You'll want to compare reviews, resale values, safety features, and any customizations that could make or break a sale for you (e.g., four-wheel drive, moonroof, remote start, steering wheel radio controls, heated seats, mobile app availability, etc.) for several vehicles. Don't let price be the only factor that determines which new (or used) vehicle you drive away in. Thoroughly check out the condition and mileage of each model you're interested in and ask yourself if it includes your list of non-negotiable features, first.

Also, be sure to test drive each car multiple times to note other important factors. Test driving can help you learn how loud the vehicle is, where its blind spots are, and the overall comfort and feel of the car. You can also feel if the vehicle has any issues during a test drive, and be able to more carefully evaluate the condition of both the interior and exterior.

Step 6: Finalize Your Car Loan

When finalizing your car loan, you'll likely need to provide some documentation, such as proof of auto insurance. Before signing, you'll want to double-check the contract to ensure there aren't any hidden fees or add-ons you didn't ask for initially. Being thorough in your review of the loan during the finalizing process can help you save money and avoid needless frustration.

If you've been preapproved, you’ll want to follow the lender’s application to finalize the funding prior to finalizing the purchase of the car. Sometimes, the dealership will work directly with the lender, so be sure to make it clear who is responsible for each step in the process to avoid issues. But it's also okay to keep in mind that the best way to finance a car might not mean getting preapproved for everyone. There are many answers to the question of how to get an auto loan, and we've outlined several for you above.

During the loan finalization, you can expect three major things to happen. You'll review and sign your loan contract and provide any necessary documentation first. Then, you'll receive the vehicle's title and registration. Finally, you'll be able to take possession of the vehicle, and once the sale is completed and the loan is secured, the car will be all yours at last. 

Driving Informed Decisions

Hopefully, now you're walking away with a much better understanding of how to get a car loan and how to finance a car. Remember that you have several options to finance a vehicle, ranging from banks to used car lots and even the internet. Above all, though, make sure to carefully evaluate your financial situation before you start shopping for a car. Also keep in mind that when it comes to finding the right car insurance, whether your car loan comes from the bank, an online lender, or the dealership, working with an independent insurance agent is the best way to make sure you have the coverage you need.