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How to Apply for an Auto Loan


How to Apply for an Auto Loan

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How to Apply for an Auto Loan

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 a car is a major expense, most car buyers finance part or all of the cost of the vehicle with a car loan.

Getting a car loan is a fairly 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 how to apply for a car loan, step by step.

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What is a Vehicle Loan?

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

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

Determine Your Budget

Before you start shopping for a new or used carit’s a good idea to think about how many cars you can afford.

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

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

How to Apply for a Loan

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

1. Compare Lenders

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

It is also wise to look at online lenders and financial institutions, as they may charge fewer fees due to lower overhead costs. Dealers 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 the interest rates charged by different lenders and the discounts available.

It is also important to evaluate the potential loan for any hidden fees, add-ons and other additional costs. This can cause your monthly payments to increase significantly and can make it difficult to buy the car you want.

You should also see if the lender assesses a penalty for early payment. This is not ideal, as 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 car 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 a loan, check your credit so you know what to expect. A good credit score usually is 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 requirements, you may need to work with a lender that offers subprime loans or loan programs for car buyers with poor 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 timely payments can help you improve your score. Reducing your total credit utilization can also improve your credit score.

4. Determine Your Down Payment

When you buy a car, you usually have to pay part of the total cost in cash. This is called a 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 amount.

The bigger your down payment, the less money you have to borrow. This reduces the risk to the lender and helps you get a lower monthly payment.

Think about how much you can afford to pay in cash at the time of purchase. You need to provide this number when applying for a loan. If you don’t have anything to put down, you may want to save money, because it’s harder to qualify for a loan without a down payment.

5. Get Pre-Qualified

The next step in apply for a car loan increasingly approved. A vehicle loan pre-approval or pre-qualification is a tentative offer for financing based on the information you provide to the lender. While it’s not a guarantee, getting pre-approved can help you establish a stronger budget and it shows the seller 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. Applications may request information such as:

  • Your name and contact information
  • Your Social Security number
  • Details about your employment situation and income
  • How much do you pay for housing each month?
  • What vehicle are you interested in buying?

Most lenders allow you to submit an application online. You may also need to provide certain documents when you finalize 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 the type of questions the lender will use.

Hard inquiries can cause your credit score to drop. However, multiple hard inquiries about your credit in a short period of time count as one inquiry, so try to apply with 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 take these requirements into account.

For example, if you’re buying from a private seller, you may not be able to get financing through a car dealership. If you plan to buy from a dealer, it’s still worth looking at the annual percentage rate (APR) options and loan terms offered by a large national or community bank, as you may be able to use other offers as leverage.

7. Start Car Shopping

After getting your pre-approval, it’s time to start car shopping. Your pre-approval amount is the maximum you can borrow, so put down about 10 to 15 percent to get the amount you can afford to spend on a car. Check 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 time: Lenders may offer 30 or 60 days to complete the financing process, and if you fail to do so within the time frame, you will have to start over with a new pre-approval.

When you’re comparing cars, check out dealers online and in person. 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 find a car to buy at a dealership, it’s wise to do a final comparison between the lenders you pre-qualify with the financing offered through the dealership.

Most automotive 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 section what you’ve pre-qualified before and see if they can beat that rate. To get an offer from a distributor, you need to submit another application with your personal and financial details.

9. Settle Your Loan

After choosing your car and doing a final comparison between lenders, the final step is finalizing the loan and buying the car. Depending on your lender, you may receive funds outright, which you can then use to buy a 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 transaction and get money for the car.

10. Prepare Payment

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

Whatever you decide, get it ready right away to avoid missing a payment or sending it late. Failure to pay on time can affect your credit and lead to possible charges.

Headshot of Elizabeth Rivelli

Finance & Insurance Editor

Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. He has extensive knowledge of various lines of insurance, including auto insurance and property insurance. His byline has appeared in dozens of online financial publications, such as The Balance, Investopedia,, Forbes and Bankrate.

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