If you're in the market for a car and need a loan to finance your purchase, it's important to understand the steps involved before you apply. From checking your credit and comparing lenders, to choosing a car and reviewing your loan terms, here's what you need to know to get a car loan.
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Check your credit score and improve it if needed
Before applying for a car loan, check your credit score and make sure it's in good standing. Lenders consider your credit score when assessing your creditworthiness and determining the interest rate and terms you may qualify for. Generally, a higher credit score can help you qualify for more favorable loan terms, while a lower score can make borrowing more expensive.
If you don't need a car loan right away and aren't happy with your credit score, consider spending some time improving it before applying. Continuing to make your debt payments on time is one of the best ways to build a positive payment history. Payment history is the largest factor in calculating a FICO® Score, accounting for 35% of the score.
According to Experian, a VantageScore® of 661 or higher is considered prime and can generally improve your chances of qualifying for an auto loan with favorable terms. There isn't a universal minimum credit score for an auto loan, however, and some lenders and marketplaces like CarMax and myAutoloan work with borrowers who have lower scores. You may still be able to get a loan, but you could face a higher interest rate, larger down payment or fewer loan options.
- Open to borrowers with bad credit
- No early payoff fees
- Prequalification available
- 100% online application process available
- Low minimum loan amount
- Allows co-borrowers
- Specializes in lending for used cars
- Financing is only available for cars sold at CarMax
- Not available in all states
- Prices are non-negotiable
- Open to borrowers with fair credit (minimum 600 score)
- Quickly connects buyers to loan offers in minutes
- No early payoff fees
- Prequalification available
- Provides multiple offers
- Fully online application available
- Co-borrowers and co-signers allowed
- Not available in all states
- Limited customer service
Compare car loan rates and terms from multiple lenders
Once your credit is in good shape, shop around with multiple lenders. Banks, credit unions and online lenders offer auto loans for new and used cars, and many allow you to check your potential rates and terms online before formally applying.
Some lenders offer prequalification, which typically involves a soft credit inquiry and doesn't affect your credit score. This can give you an idea of how much you may be able to borrow and the interest rate you could receive. Keep in mind that prequalification isn't a guarantee of approval or your final loan terms.
Auto loan lenders with easy prequalification include Capital One, Carvana and Consumers Credit Union (CCU).
- Lends to borrowers with bad credit
- No early payoff fees
- Prequalification available
- The Auto Navigator tool lets you get prequalified in minutes for financing for a new or used car (should be used before you go to a dealer)
- Only available for vehicles from participating dealers
- You must apply at the dealer to get the final loan terms
- Open to borrowers with bad credit
- No prepayoff penalty
- Prequalification available
- Allows co-signers
- Offers an online application experience, which is ideal if you don't want to have to go to the dealer yourself
- Preapproval offers are valid for up to 45 days
- Financing only available for cars sold through Carvana
- Not available in all states
Consumers Credit Union Auto Loan
APR
Starting at 3.99%
Loan type
New and used cars, auto refinancing, RVs, boats, classic cars, powersports vehicles
Loan amounts
Up to $100,00
Terms
1 to 90 months
Minimum credit score
Not disclosed
Fees
No origination fee. $30 late fee after 10-day grace period
Availability
Financing available nationwide. Membership in CCU requires a one-time $5 fee to the Consumers Cooperative Association and a $5 deposit into a savings account.
Terms apply.
Pros
- Low rates for qualified borrowers
- Custom terms between 1 and 90 months available
- No restrictions on car age or mileage
- Financing up to 125% of the vehicle value
- Qualified buyers can push first payment back up to 60 days
Cons
- You must bundle automatic payments and use car-buying service to unlock the lowest rates
- No prequalification with a soft credit check.
Lenders don't all use the terms "prequalification" and "preapproval" the same way. For some, prequalification is an initial estimate based on information you provide, while preapproval may involve a more thorough review and a hard credit inquiry. Check with each lender to understand what its process involves.
Getting quotes from multiple lenders can help you compare interest rates, loan amounts and repayment terms. If lenders perform hard credit inquiries, try to complete your rate shopping within a 14- to 45-day window; credit-scoring models generally treat multiple auto-loan inquiries made within this period as a single inquiry.
Save for a down payment
A general rule of thumb is to put down at least 20% of the purchase price for a new car and at least 10% for a used car. If you have less-than-ideal credit, you may also want to consider a larger down payment, which could help you qualify for better loan terms.
The more you put down, the less you'll need to borrow, which can lower your monthly payments and reduce the amount of interest you pay over the life of the loan. However, Kelley Blue Book recommends considering your overall financial situation and cautions against using essential savings, such as money in your emergency fund, to make a larger down payment.
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Choose a car and review your loan options
Once you know how much you can afford to borrow, start shopping for a car that fits your budget. Knowing your potential loan amount and interest rate can help you narrow your search and avoid falling in love with a car that's outside your budget.
When you find a car you want to buy, compare the financing options available to you, including offers from your lender and the dealership. Look at the interest rate, loan term, monthly payment and total cost of the loan to determine which option fits your budget.
Apply for the loan and review the terms before accepting
Once you've decided on a car and lender, review the financing terms carefully before signing the loan agreement. If you're considering dealer financing or a promotional offer from the manufacturer, check the eligibility requirements and make sure the offer applies to the specific vehicle you're buying. Promotional financing rates may be limited to certain makes or models and may have other restrictions.
Before accepting the loan, make sure you understand and agree to the APR, interest rate, loan amount, loan term, monthly payment and total cost of the loan. Also check for any fees, add-ons or other costs included in the agreement.
Finally, make sure the financing is fully approved and the terms are final before you sign and drive the car home. Get a copy of everything you sign for your records.
FAQs
Where can you get a car loan?
There are three common ways of financing a car: dealer financing, traditional banks and online lenders. Dealer financing is where the dealer helps you secure a loan for your purchase. Traditional banks and credit unions also offer car loans directly. Online lenders can include neo banks and online marketplaces that match you to lenders.
Can I negotiate my rate on an auto loan?
You generally can negotiate interest rates when shopping for a car loan since the rate the dealership gives you may sometimes be higher than what the lender offered.
Why would you be denied for a car loan?
Lenders may reject your application for a few reasons, including having a low or no credit score, a DTI ratio that's too high or not having enough verifiable income.
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