How To Get a Car Loan

If you’re thinking about getting a car loan, you know it can be a scary prospect. Monthly car payments have been on the rise lately, soaring to an average of $716 for new cars and $526 for used cars during the fourth quarter of 2022.

The good news is there are many things you can do to boost your odds of getting approved for a car loan with a payment you can afford. It’ll take a little bit of preparation and work on your part, but it’s time well spent. 

Check Your Credit History

The first step to getting a car loan is making sure that the most important information your lender uses to make a decision—i.e., the information on your credit reports—is accurate. Unfortunately, errors on credit reports are all too common, affecting about 25% of people. Five percent may have errors that are bringing down their credit scores. This can unfairly harm you when you apply for a loan.

Luckily, it only takes a few minutes to check your credit reports on AnnualCreditReport.com. You can check other websites for your credit score, which can help you identify what rates you might qualify for in advance. If you find any errors on your reports, you can file a credit dispute with the credit bureaus to have the information corrected before you apply for a car loan. 

Figure Out Your Car Budget

If you figure out how much you can afford for a car before you buy one, you can save yourself a lot of hassle and heartbreak later if you find out the car you picked out is actually not affordable. To start, put together a detailed monthly budget so you know exactly how much you have available each month for car expenses. 

From this number, try to estimate the monthly cost for all of the things that go along with car ownership, including fuel, car insurance, and repairs and maintenance. The remaining amount is how much you can afford for a car payment. Don’t feel like you need to spend exactly this amount; it’s good to leave yourself a buffer in case of emergencies or if your budget changes over time (or, more accurately, when it changes). 

You can then play around with a car loan calculator to find out what loan amount you can afford, based on how much you already have saved for a down payment and the car loan interest rate you might qualify for based on your credit score. This will help you zero in on a car price you can afford without stressing yourself out. 

Get Preapproved for Multiple Car Loans

A good rule of thumb is to always check your rate with at least three lenders for any type of loan, although more is better. When it comes to car loans, this is called getting preapproved and it basically means you’re submitting a preliminary auto loan application. In addition to helping you zero in on the best loan, a preapproval letter also gives you a bargaining chip to use later.

To get preapproved for a car loan, lenders will want to see certain documents, such as your driver’s license, recent pay stubs or other income, recent tax returns, and/or bank account statements. You can speed the process up if you collect these in advance and keep them organized in a ready-to-go file. 

The Best Auto Loan Rates

Finding the Right Vehicle for Your Budget

Now that you know whether you’re likely to be approved for a car loan that fits your budget, you’re more than a tire-kicker and can seriously start shopping for a car. Depending on how much you can afford, you might consider a new or used car, and you can buy it from a private party (like on Craigslist) or from a dealer. 

If you’re buying a car from a dealership, one of the first questions most salespeople will ask is your monthly budget—a trick question that often allows them to sell you more than you need. Instead, tell them you’re a cash buyer and you’re only interested in the total vehicle price. If you’re buying a used car, make sure to budget for the cost of an independent mechanic inspection so you can make sure you’re not buying a lemon.

Compare Preapproval Offers to Dealership Offer

If you’re going with a car from a dealership, you can now reveal that you have several preapproved offers for financing already. Dealerships treat car loans as a separate sales product just like the car itself, and you can use this to your advantage by asking if they can beat any of the financing offers you’ve already lined up. Just about anything is up for negotiation aside from the taxes, title, and registration fees. 

Make sure to read each preapproval offer carefully. Aside from the interest rate, pay attention to these factors:

• Hidden fees: These can include things like prepayment penalties.
• Trade-in value: This is often negotiable and you can opt to sell the vehicle yourself if you’re not happy with the amount listed in the contract. 
• Loan term length: The longer your loan term, the more interest you’ll pay in the long run. 
• Vehicle add-ons: Dealers commonly add equipment or optional protection plans onto the contract, which you can get cheaper elsewhere (if you even need them at all).

Make Monthly Payments

Once you’ve signed on the dotted line and the dust has settled, your lender will reach out to you to start your monthly payments. It’s highly recommended that you sign up for autopay on your new car so that you never have to worry about missing any payments. 

If you miss a payment, you’ll face more than just an annoying late fee. It can also cause your credit score to drop significantly, and that can have negative ripple effects in years to come. Making even one payment 30 days late can cause your credit score to drop by over 100 points, in the case of someone with excellent credit paying off a mortgage (which is treated similarly to a car loan). 

Even worse, each mark will stay on your credit reports for seven years, although its negative impact will fade over time. And if you don’t catch up on those missed payments, your lender can repossess your car and leave you stranded.