You can get a car loan by going to a dealer and working with its finance department to compare offers from different lenders. However, you might get a better interest rate if you get preapproved directly with a lender before visiting the dealership. Plus, you won't have the extra pressure of figuring out financing while the car salesperson waits in the next room.
Here are six steps you can take to go from estimating your monthly payments to driving away in your new car.
1. Check Your Credit Score
Your credit score can be a major factor in whether you'll get approved for an auto loan and the interest rate you receive.
You can check your FICO® Score☉ for free from Experian. Keep in mind that auto lenders may use different types of scores, and what counts as a good credit score can vary depending on the lender and scoring model.
For example, according to Experian's State of the Automotive Finance Market report for the second quarter (Q2) of 2024, here are the average loan terms that people received based on their VantageScore® 4.0 credit score:
| Average Terms for a New Car Loan | ||||
|---|---|---|---|---|
| Credit Score Range | Loan Amount | Term Length | APR | Monthly Payment |
| Super prime (781 - 850) | $39,172 | 64 months | 5.25% | $717 |
| Prime (661 - 780) | $42,993 | 71 months | 6.87% | $742 |
| Near prime (601 - 660) | $42,467 | 74 months | 9.83% | $765 |
| Subprime (501 - 600) | $38,045 | 73 months | 13.18% | $749 |
| Deep subprime (300 - 500) | $33,917 | 72 months | 15.77% | $719 |
Source: Experian data as of Q2 2024; VantageScore 4.0 used
As you'll see below, average loan amounts on used cars are generally lower, but average APRs on auto loans are typically higher. Average loan term lengths and monthly payments are lower across the board as well.
| Average Terms for a Used Car Loan | ||||
|---|---|---|---|---|
| Credit Score Range | Loan Amount | Term Length | APR | Monthly Payment |
| Super prime (781 - 850) | $28,079 | 66 months | 7.13% | $522 |
| Prime (661 - 780) | $27,594 | 69 months | 9.36% | $518 |
| Near prime (601 - 660) | $25,238 | 68 months | 13.92% | $535 |
| Subprime (501 - 600) | $21,918 | 66 months | 18.86% | $536 |
| Deep subprime (300 - 500) | $19,950 | 64 months | 21.55% | $532 |
Source: Experian data as of Q2 2024; VantageScore 4.0 used
2. Determine Your Budget
You'll want to consider how your new auto loan will fit into your monthly budget before shopping for a car.
You can use Experian's car payment calculator to compare estimated loan offers based on how much you borrow, the loan's interest rate and the repayment term.
The averages above could be helpful as you create estimated offers and determine a workable loan amount. Just be mindful of how increasing the repayment term might lower your monthly payment but will also increase how much you repay overall.
Additionally, consider how the type of vehicle you buy will affect the other ongoing costs of ownership, including:
- Insurance premiums
- Fuel or electricity
- Maintenance
- Repairs
You'll also want to consider your down payment and whether you'll have money from selling or trading in a vehicle.
Finally, add up your other monthly debt obligations, such as student loans, mortgage payments and minimum monthly credit card payments. Auto lenders typically like to see a debt-to-income ratio (DTI)—the percentage of your gross monthly income that goes toward debt payments—below 50%. But an even lower DTI could help you qualify for a better offer.
Learn more >> What's the Average Length of a Car Loan?
3. Learn About Different Types of Auto Lenders
Understanding where you can shop for an auto loan is also important. Some options to consider include:
- Banks: If you have an existing relationship with a bank, check to see if you qualify for a relationship discount.
- Credit unions: Credit unions often offer lower interest rates than traditional banks, but you must be a member to get approved for a loan. In some cases, you can join during the application process.
- Online lenders: Online lenders let you apply from anywhere, and some marketplace websites even make it possible to get quotes from multiple lenders with just a single online form. Interest rates can also be comparable with credit union rates.
- Dealer-arranged financing: Dealers can quickly shop for auto loan offers on your behalf, which can be a convenient way to get competing offers. But dealers can also mark up the rate, so you might get a better offer if you go directly to a lender.
- Captive financing: Major manufacturers may offer financing for their vehicles. Some of these include promotional offers that you won't receive elsewhere, such as 0% intro APR offers. However, you generally need to buy one of their new or certified pre-owned vehicles to qualify.
- Buy here, pay here financing: Buy here, pay here (BHPH) dealers often offer financing to people who have bad or no credit and can't qualify elsewhere. Although it's easier to get approved, the loans often have high interest rates and several fees.
Learn more >> How to Get the Best Car Loan
4. Get Prequalified or Preapproved for Several Car Loans
An auto loan prequalification or preapproval can help you find out if you'll likely get approved and compare estimated loan offers.
Prequalifications and preapprovals don't obligate you or the lender to enter into a loan agreement, and some lenders use the terms interchangeably. But a preapproval is generally the more complex—and more accurate—option:
- Auto loan prequalification: You'll complete a preliminary application to find out if you're likely to get approved and see estimated loan offers. You might have to provide your estimated income and monthly loan payments. If there is a credit check, it will often result in a soft inquiry that doesn't affect your credit scores.
- Auto loan preapproval: This process can be more involved than a prequalification. You might have to submit documents that verify your income and agree to a credit check that results in a hard inquiry, which can impact your credit slightly. The verified information involved with preapproval could lead to more accurate estimated loan offers.
| Prequalification vs. Preapproval | |
|---|---|
| Prequalification | Preapproval |
| If a credit report is reviewed at all, it typically results in a soft credit inquiry | Sometimes results in a hard inquiry |
| May ask about your income and credit | May require submitting documents to verify your information |
| Does not guarantee approval | Does not guarantee approval |
| May be less accurate than a preapproval offer | May be more accurate than prequalification |
In either case, you may need to submit your:
- Full name
- Social Security number
- Date of birth
- Address
- Contact information
- Vehicle make and model
- Desired loan amount
- Income
When you're prequalified or preapproved, the lender may give you a letter that you can show sellers to confirm the estimated maximum loan amount you'll receive—you can borrow less if you prefer.
Limit the Impact of Rate Shopping on Your Credit
Preapprovals might lead to a hard inquiry, which can ding your credit scores by a few points. Additionally, you'll have to submit an official loan application before actually buying a car, which will also likely lead to another credit check and a new hard credit inquiry.
Multiple hard inquiries can lead to a larger credit score drop. However, credit scoring models allow you to shop for an auto loan without doing extra damage to your credit scores.
The specifics depend on the type of credit score, but multiple auto loan inquiries that occur within a 14-day period will count as a single inquiry for scoring purposes. So if possible, keep your rate shopping within that period.
Learn more >> Do Multiple Loan Inquiries Affect Your Credit Score?
5. Choose a Vehicle and Dealership
With your estimated loan offers in hand, you can shop for a vehicle knowing approximately how much you can spend. Choose the make and model of the car you want, plus whether you want the most recent year or a car from a prior year, which is generally cheaper.
Shop around and compare offers from different dealers to see who will give you the best price. When comparing dealerships, consider online and word-of-mouth reviews, location, rebates and incentives.
Learn more >> How to Negotiate a Car Price
6. Finalize the Loan
After you reach an agreement with the dealer, contact your lender to finalize the loan.
You may need to provide updated or additional documentation to verify your identity, income and address, such as copies of a government ID, pay stub and utility bill. You may also need to share copies of the purchase agreement and proof of insurance.
If you're approved, you'll receive a loan agreement detailing the terms and conditions of the contract. Review the agreement carefully, then sign it to complete the process. Depending on the lender, you might have received a check that you'll use at the dealership. Or, the lender might pay the dealer directly.
If you don't get prequalified or preapproved on your own, you might have trouble getting an auto loan. You could try working on your credit or trying to get approved for a lower loan amount by increasing your down payment or buying a less-expensive vehicle.
Applying with a creditworthy cosigner also might help you qualify for a larger loan or lower interest rate. Just be sure that they understand how cosigning can impact their credit.
Frequently Asked Questions
Some lenders only offer loans if you're purchasing a car from within their network of dealers, but it is possible to obtain a car loan to buy a car from a private seller. When you're financing the purchase this way, the lender might send the money to you directly instead of paying the seller. However, your new car will still be collateral for the loan.
It's difficult to know the best place to get a car loan ahead of time. Offers can vary depending on the vehicle, your creditworthiness, your relationship with the lender and the lender's desire to book more loans right now. Comparing multiple offers could be the best way to find out which lender will give you the best deal right now.
You can get a car loan with bad credit, but the loan might have a high interest rate and fees. If you can wait, try to improve your credit before applying. If you can't wait, your options may be limited, so shopping around and comparing offers from multiple lenders might be extra important. Buy here, pay here dealers almost always offer financing—sometimes without a credit check—but they can also be relatively expensive compared to financing from other lenders.
Compare Offers to Make an Informed Decision
Most people finance the purchase of a new car, and many people use financing when buying used cars as well. However, even if you need a new car immediately, it's important to take your time to shop around for the best loan and understand all the terms and conditions before you sign for a loan.
If your credit needs some work and your vehicle situation isn't urgent, check your credit report for free from Experian. Once you know what's affecting your credit, you can use the insights to improve your credit scores and potentially qualify for better loan offers.