How to Get a Car Loan (Step-by-Step)

Written by Kim PinnelliReviewed by Nathan Brown, CFP®Updated: 3rd Nov 2022
Share this article

Disclaimer: This post contains references to products from one or more of our advertisers. We may receive compensation (at no cost to you) when you click on links to those products. Read our Disclaimer Policy for more information.

Getting a car loan isn’t as hard as it seems. You don’t need perfect credit, and you might even get by without putting any money down on the car. Here’s everything you must know about how to get a car loan.

How to Get a Car Loan: 7 Steps to Purchasing Your Dream Car

#1. Know Your Credit Score

Your credit score is the first thing lenders look at when you apply for a car loan, and it’s also the factor they’ll use to determine your interest rate, term, and the fees they’ll charge.

A higher credit score gets you better terms, and a lower credit score makes it harder to get approved. If you do get approved with a low credit score, you’ll likely pay more fees and/or a higher interest rate, making the car more expensive.

#2. Determine How Much You Can Spend on a Car

Knowing how much you can spend on a car is important. Look at your budget and see how much room there is for a car payment. Most lenders prefer your debt-to-income ratio is 40% or less. This means your total debts don’t exceed 40% of your income, but some lenders will allow DTIs as high as 50%. Just make sure it fits within your budget.

Be realistic when you determine how much you can spend on a car. Don’t max out your spending just because you qualify for it. Look at your budget closely and see how the car payment fits into it and what it will do the amount you can save for other financial goals monthly.

#3. Shop Around and Compare Auto Loan Lenders

Compare offers from at least three lenders. You can get financing from a bank, credit union, direct lender, or dealership.

It’s not a bad idea to get a quote from each type of lender to compare your options. Usually, online auto lenders offer the best deals, but if you have a good relationship with your credit union or bank, you may get lower rates there too.

When you compare auto loans, look at the big picture. Don’t focus just on the interest rate because it can be misleading. Look at the loan’s total cost or compare each loan’s APR. The APR is the total cost of the loan written as a percentage of the loan amount. The higher the APR is, the more the loan will cost.

>> More: Best Auto Loan Rates

#4. Get Pre-Approved for an Auto Loan

Once you decide how to get financing, get pre-approved for a car loan. This does two things:

  1. You’ll know how much you can afford. When you shop for a car, you’ll be able to stay within your budget, so you don’t waste time looking at cars you can’t afford.
  2. You’ll have a bargaining tool when you shop for cars. If you get any financing besides dealer financing, you can show the salesman that you’ve been pre-approved for financing, which makes it a cash deal. It’s sometimes easier to negotiate with a cash deal.

#5. Pick Out Your Dream Car

The next step is the fun part – picking out your dream car! Remember the steps above, though. Focus on your budget and stick within it. Don’t feel like you have to spend as much as you get pre-approved for if it’s not in your budget. Only you know what you’re comfortable affording.

Just like your car loan, shop around for the best price on the car. If it’s a car many dealers have, don’t be afraid to shop around and share the lower prices one dealer provides. You never know when a dealership may match or beat the offer.

#6. See if the Dealer is Offering Auto Financing

Always check with the dealer to see what auto financing may be available. While dealer financing typically can’t beat the terms you get at a bank or lender, if the car manufacturer offers financing, it could be as low as 0% APR or slightly higher, but sometimes better than what a bank can offer. You may not receive rebate offers if you take the 0% financing deal, again look at total cost.

You may qualify if you have great credit and a low debt-to-income ratio. Car manufacturer financing usually requires very good credit, typically scores over 700.

>> More: What Credit Score Is Needed to Buy a Car?

#7. Choose & Apply for Your Auto Loan

Once you’ve evaluated your options, it’s time to choose your loan and apply. It’s easy to apply for car financing, and you’ll typically get an answer within minutes. If you’re getting financing at the dealer, you may even be able to negotiate the rate, so make sure you’re getting the lowest rate or fees possible. 

If you’re getting funding anywhere but the dealer, you’ll likely get a cashier’s check for the full amount of the loan so you can pay the dealer. Your dealer and lender will tell you what steps you should take to finalize the transaction.

If you get financing from the dealer, everything is handled there – you don’t have to do anything except choose your financing and sign some paperwork.

What Is a Car Loan?

A car loan is a secured loan that uses the car as collateral. You can borrow up to the amount of the car’s value. Car loans are available at private banks, online auto loan lenders, and car dealerships. You’ll make monthly payments of principal and interest to the bank that lent you the money, and once you pay the car loan off in full, you’ll receive the title to your car.

How Do Car Loans Work?

A car loan is an installment loan. You make equal payments monthly until the end of the term. Loan terms last from 2 to 7 years. The loan payment depends on how much you borrow, the interest rate, and the term (the length of time you borrow the funds).

The longer your loan term is, the lower your payments. But keep in mind, the longer the term is, the more interest you’ll pay because it will take you longer to pay the debt back.

Car Loan Terms to Know

  • Annual Percentage Rate (APR): The APR is the total cost of the loan displayed as a percentage. It includes the interest you’ll pay for the loan and the lender fees charged for borrowing the money. The better your qualifying terms (higher credit score, shorter-term, etc.), the lower your APR will be.
  • Loan Term: The loan term is how long you must pay the loan back. Most lenders offer 24, 36-, 48-, 60-, and 72-month terms. The longer the term, the more interest you pay and the longer it takes to own the car free and clear.
  • Down Payment: Any money you invest in the car is a down payment. It’s your investment in the car, which also lowers how much money you must borrow, the cost of your monthly payment, and the terms lenders offer.
  • Monthly Payment: This is the amount you pay each month to pay the loan. Every payment includes interest and principal, but some payments may also include fees, such as late fees.
  • Principal: This is the amount you borrow to buy the car. It doesn’t include any interest or other fees. For example, if you borrow $10,000 to buy a car, your principal amount is $10,000.
  • Total Cost: This is the full amount you’ll pay over the life of the loan in principal and interest charges. This number can help you determine if the loan is worth it, and it helps you compare it to other loans.
  • Amortization: This is the process of paying off your loan. Your amortization schedule shows the amount of principal and interest you’ll pay each month. At the start of the loan, you’ll pay more interest than the principal. As you pay the principal down, the interest charges decrease, and eventually, you pay more principal than interest. This usually happens near the end of the loan.
  • Car Taxes: Just like any purchase you make; you’ll pay taxes when you buy a car. The car taxes get added to the purchase price and can be paid for with the loan if you wish.
  • Loan-to-Value Ratio: The LTV compares your loan to the car’s value. The more money you put down on the car, the lower your LTV. Lenders like lower LTVs because they are less risky. The more money you have invested in your car, the less likely you will default on your loan.
  • Interest Rate: This is the rate a lender charges to loan you the money. This isn’t the loan’s total cost as a percentage. It’s best to compare APRs than interest rates to see which loan offers the best deal.

How to Save Money on a Car Loan

Luckily, it’s easy to save money on a car loan if you use the right principles. Here are some simple tips to follow.

#1. Stick to a Budget

Figure out what you can afford and stick with it. Don’t go over budget because you fell in love with a car or think the payment is affordable. Determine what you can afford and make sure any car you consider buying has a payment that is equal to or less than this amount.

#2. Compare Lenders & Rates

Always get at least three quotes for a car loan. If you shop around for a car loan quickly, you won’t hurt your credit. The credit bureaus recognize the need to shop around, so they hit you with one inquiry for all car loan inquiries that occur within a short time.

When you compare offers, look at these factors:

  • Interest rate
  • Fees
  • Loan terms
  • APR

Choose the loan with the lowest APR and the most attractive term. Don’t get caught up in interest rates alone because you could end up paying more for a loan than you realized.

#3. Make Large Monthly Payments

Most lenders allow you to prepay your loan without a penalty. This means you can make extra payments toward the principal as you want. If you pay the principal down faster, you’ll pay less money in interest, and you’ll own the car faster.

#4. Consider Refinancing Later After Some Time

If you can’t get the best financing terms when you apply for a car loan, consider refinancing your auto loan when your credit is better. A lower interest rate could save you money monthly and over the life of the loan. You can also refinance if you can afford a shorter term to pay the loan off faster, and you’ll save even more money on interest this way.

Who Offers Car Loans?

You can get car loans in many places, but here are the most common.

Dealership Financing

Dealers usually offer financing  right there on the spot. You work with the finance manager, a ‘broker’ between you and the banks. Dealerships earn a commission from the bank, so they try to push you to finance with them, but they don’t always have the best deals.

Direct Lenders, Banks, & Credit Unions

If you have good credit, look around for a better car loan option. Banks, credit unions, and online direct lenders are great options for a car loan.

You’ll usually find they have lower interest rates and fees. Plus, if you get financing yourself, you become a ‘cash deal’ at the dealership, which may give you more opportunity for negotiating.

What Are the Advantages of Car Loans?

  • You can buy a car with little money down
  • Car loans help you build your credit history (if you have on-time payments)
  • Car loans are secured, so the rates are generally low

What Are the Disadvantages of Car Loans?

  • You’ll pay interest and fees, which makes the car more expensive
  • You don’t own your car until you pay the loan off in full
  • Cars are a depreciating asset, so you could get upside down on your loan

Is It Hard to Get a Car Loan?

It’s not hard to get a car loan if you have decent credit and an average debt-to-income ratio. You have many options to find a car loan, including your local bank, online banks, credit unions, and the dealer.

If you have good credit, you should have many options to secure a car loan. If you have less than perfect credit, you may have fewer options and higher costs. The dealership is often the best choice if you have bad credit.

How Do I Qualify for a Car Loan?

To qualify for a car loan, you must prove your income and current debts and show decent credit. Every lender differs, but here’s what most lenders want:

  • A debt ratio of 40% or lower (some go as high as 50%)
  • A good credit score (680 or higher)
  • A decent down payment (cash or a trade-in)
  • Stable employment

Is It Better to Get an Auto Loan from Your Bank or the Dealership?

If you qualify for bank financing, you’re typically better off taking that option. While it’s convenient to get financing from the dealer, you’ll typically pay for that convenience.

Dealers do all the work when you get financing through them, and in return, they often inflate the interest rate the bank offers, so they make a commission on the deal.

Securing financing yourself ensures you’re paying the rate you’re meant to pay, and you aren’t paying any extra fees for the service.

Bottom Line: How to Get a Car Loan

It’s easier than most people think to get a car loan. Before you choose one, make sure it’s the lowest rate and most attractive term you’re eligible for. Don’t worry if you can’t get the best rate and term right now because you don’t qualify, though. If you improve your credit, you can refinance down the road to save money on your loan.

Keep Reading:

Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.