How to Apply for an Auto Loan

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Buying a new or used car is an exciting experience, whether it’s your first car or you’re upgrading to your dream car. Part of the car buying process involves deciding how you will pay for the vehicle. Because cars are a big expense, most car buyers finance some or all of the vehicle’s cost with a car loan.

Getting a car loan is a relatively simple process, but if you’ve never taken out a car loan before, it’s important to understand how it works and what to expect. In this guide, we will explain step-by-step how to apply for a car loan.

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What is a car loan?

A car loan is one method of financing a car purchase. You borrow money from a lender, such as a bank or credit union, which is used to buy a used or new car. In exchange for the money, you agree to repay the full amount, plus interest, over a specific time frame (usually between 24 and 72 months).

Until the car loan is paid off in full, your lender legally owns the vehicle. If you stop making the payments, the lender has the authority to repossess your vehicle as collateral. Once the loan is paid, you become the legal owner and can sell or trade in the car whenever you want.

Determining your budget

Before you start shopping for a new or used carIt is a good idea to find out how much car you can afford.

Most financial experts recommend spending no more than 10 percent of your take-home pay on a monthly car loan payment. You can also use an auto loan calculator to find out how much you can afford to spend on a car.

Once you’ve determined your price range, you need to research what taxes and fees you’ll have to pay as part of the deal. Taxes and fees depend on the state where you buy the car, whether it’s new or used, and whether you’re trading in a vehicle as part of the deal.

How to apply for a loan

Applying for a car loan isn’t complicated, but there are a few things you can do to simplify the process. Here are the steps to follow if you want to take out a car loan:

1. Compare lenders

Before submitting a loan application, take some time to compare different lenders. You might start with your bank or credit union, as an established relationship can help you qualify for a better rate.

It’s also smart to look into online lenders and financial institutions, as they may charge fewer fees due to lower overhead. A dealer can also provide financing for cars purchased at their location.

When comparing lenders, make sure you look at similar loans. For example, start by comparing terms for a $15,000 loan over 60 months. See what interest rates different lenders charge, and what discounts are available.

It’s also important to check potential loans for any hidden fees, add-ons, and other extra costs. This can cause your monthly payment to increase significantly and can make it harder to afford the car you want.

You should also check if the lender imposes a penalty for early payment. This is not ideal because it limits your ability to pay off the loan early, which can help you avoid high interest fees.

2. Check your credit

Your credit history and credit score affect your ability to qualify for a car loan, as well as the interest rate you receive. Some auto lenders offer financing to borrowers with lower credit scores, but these loans usually come with higher interest rates and less favorable terms.

Before you start applying for loans, check your credit so you know what to expect. A good credit score is usually 661 or higher. You usually need a score of at least 500 to qualify for a car loan at all.

If your score falls below the minimum requirement, you’ll likely need to work with a lender that offers subprime loans or a loan program for car buyers with bad credit.

3. Improve your credit score

If your credit is low, consider taking steps to improve your score before applying for a car loan. Paying off your debt, going through the debt consolidation process, and making payments on time can all help you improve your score. Reducing your credit utilization amount can also increase your credit score.

4. Determine your down payment

When you buy a car, you usually have to pay a portion of the total cost in cash. This is called the down payment. Some lenders have strict down payment requirements, such as a percentage of the purchase price. Others allow buyers to choose their own down payment amounts.

The larger your down payment, the less money you will need to borrow. This reduces the risk for the lender and helps you get a lower monthly payment.

Determine how much you can afford to pay in cash at the time of purchase. You will need to provide this number when you apply for a loan. If you have nothing to put down, you may want to save money because it’s harder to qualify for a loan without paying down.

5. Be pre-qualified

The next step in apply for a car loan is pre-approved. A car loan pre-approval or pre-qualification is a preliminary offer for financing based on the information you give the lender. While it’s not a guarantee, getting pre-approved can help you establish a firmer budget, and it shows sellers that you’re a qualified and serious buyer.

Getting pre-qualified for a car loan involves filling out a lender’s application and providing basic financial and personal information. The application may request information such as:

  • Your name and contact details
  • Your social security number
  • Details about your work situation and income
  • How much you pay for housing each month
  • Which vehicle you are interested in buying

Most lenders allow you to submit an application online. You may also need to provide certain documents when finalizing the loan, such as your driver’s license and proof of insurance.

The loan pre-approval process usually involves a hard or soft inquiry on your credit report, depending on the lender’s process. Before you submit an application, check what type of inquiry the lender will use.

A hard inquiry can lower your credit score. However, multiple hard inquiries on your credit within a short period of time count as one inquiry, so try to apply to all potential lenders within a day or two.

6. Submit multiple applications

Applying to multiple lenders can help you get the best rate. Not all lenders offer financing for all car purchases, so be sure to consider these requirements.

For example, if you’re buying from a private seller, you probably won’t be able to get financing through a car dealer. If you’re planning to buy from a dealer, it’s still worth looking into the annual percentage rate (APR) options and loan terms offered by a major national bank or a community bank, as you may find other can use offers as leverage.

7. Start Car Shopping

After getting pre-approved, it’s time to start car shopping. Your pre-approval amount is the maximum you can borrow, so subtract about 10 to 15 percent to get the amount you can afford to spend on a car. Review any restrictions that may apply to your car loan, such as:

  • Excluded Brands: Some lenders exclude certain car brands or vehicle types from lending options.
  • Purchase timeframe: A lender may offer 30 or 60 days to complete the financing process, and if you fail to do so within the time frame, you have to start over with a new pre-approval.

As you compare cars, check out online and in-person dealers. You can also use sites like eBay Motors, Craigslist, and Facebook Marketplace to view cars from private sellers in your area.

8. Do a Final Comparison

If you’re getting a car to buy from a dealer, it’s smart to do a final comparison between the lender you’re pre-qualified with and financing offered by the dealer.

Most car manufacturers have their own financial institutions, and they may be able to offer lower rates than other lenders. This is especially true if you are buying a brand new car.

Your pre-approval letter can come in handy here. Show the dealer’s finance department that you previously pre-qualified for and see if they can beat that rate. To get an offer from the dealer, you will need to submit another application with your personal and financial details.

9. Finalize your loan

After choosing your car and making a final comparison between the lenders, the last step is to finalize the loan and buy the car. Depending on your lender, you may receive the funds directly, which you can then use to buy the car. If you get financing through a dealer, the funds go directly from the lender to the dealer.

Most private sellers require buyers to use a cashier’s check or cash for security purposes. If you’re buying from a private seller, talk to your loan officer or representative to find out how to complete the deal and get the money for the car.

10. Set up payments

You usually have about a month or so between the settlement of the loan and when your first payment is due. During the loan process, confirm the due date of the first payment and determine how you will make the payment each month. Some lenders offer automatic payment, where the payment is automatically deducted from your checking account each month.

Whatever you decide, set it up right away to avoid missing or late filing a payment. Not paying on time can affect your credit and lead to potential fees.

Head shot by Elizabeth Rivelli

Finance & Insurance Editor

Elizabeth Rivelli is a freelance writer with over three years of experience covering personal finance and insurance. She has extensive knowledge of various lines of insurance, including auto insurance and property insurance. Her byline has appeared in dozens of online finance publications, such as The Balance, Investopedia, Reviews.com, Forbes and Bankrate.