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. Since cars are a major expense, most car buyers finance some or all of the cost of the vehicle with a car loan.

Getting a car loan is a relatively easy 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 an Auto Loan?

Car loans are one method of financing car purchases. You borrow money from a lender, such as a bank or credit union, to buy used goods or new car. In return for the money, you agree to pay back the full amount, plus interest, over a specified period of time (usually between 24 and 72 months).

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

Determine Your Budget

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

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

Once you have determined your price range, you should research what taxes and fees you will have to pay as part of the transaction. Taxes and fees depend on the country where you buy the car, whether it is new or used, and whether you are trading 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 must follow if you want to take out a car loan:

1. Compare Lenders

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

It’s also smart to look into online lenders and financial institutions, as they may charge less due to lower overhead costs. Dealers can also provide financing for cars purchased at their locations.

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

It is also important to assess a potential loan for hidden, additional, and other additional fees. This can cause your monthly payments to increase substantially and can make it more difficult to buy the car you want.

You should also see if the lender assesses penalties for early repayment. This isn’t ideal, as it limits your ability to pay off loans early, which can help you avoid high interest costs.

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 a loan, check your credit so you know what to expect. Usually a good credit score 661 or higher. You usually need a minimum score of 500 to qualify for any car loan at all.

If your score falls below the minimum requirements, you may have to work with a lender that offers subprime loans or loan programs 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 debts, going through the debt consolidation process, and making your payments on time can all help you improve your score. Reducing your credit utilization amount can also improve your credit score.

4. Determine Your Down Payment

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

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

Find out how much you can afford to pay in cash at the time of purchase. You must provide this number when applying for a loan. If you don’t have anything to save, you may want to save some money, as it’s more difficult to qualify for a no-down payment loan.

5. Get Prequalified

The next step in apply for a car loan getting approved beforehand. An auto 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 set a stronger budget, and it shows sellers that you’re a serious, quality buyer.

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

  • Your name and contact information
  • Your Social Security Number
  • Details about your employment and income situation
  • How much do you pay for housing each month
  • What vehicle would you like to buy

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

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

Tough requests can cause your credit score to drop. However, a few tough questions about your credit in a short timeframe count as one question, so try to apply with all potential lenders within a day or two.

6. Send Multiple Applications

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

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

7. Start Car Shopping

After getting pre-approval, it’s time to start car shopping. Your pre-approved amount is the maximum you can borrow, so subtract about 10 to 15 percent to get the amount you can afford to spend on the 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 loan options.
  • Purchase time frame: Lenders may offer 30 or 60 days to complete the financing process, and if you fail to do so within that timeframe, you’ll have to start over with a fresh initial approval.

When you are comparing cars, look at 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 best to make a final comparison between your qualified lender and the financing offered through the dealership.

Most auto 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 new car.

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

9. Complete Your Loan

After choosing your car and doing a final comparison between lenders, the last step is to complete the loan and buy the car. Depending on your lender, you may receive funds directly, 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 the buyer to use checks or cash for security purposes. If you are 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. Arrange Payment

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

Whatever you decide, arrange it right away to avoid missed payments or late deliveries. Failing to pay on time can affect your credit and lead to potential charges.

Headshot of Elizabeth Rivelli

Finance & Insurance Editor

Elizabeth Rivelli is a freelance writer with over three years experience in finance and personal 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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