What to know when applying for an auto loan

While car loans usually have fixed interest rates and loan terms, they can often be negotiated, depending on your lender. Your loan rate will generally depend upon your credit score — the higher your credit score, the lower your annual percentage rate. A higher credit score may also give you access to a larger loan amount or more favorable repayment terms.


Next, you should consider loan terms. Let’s say you qualify for a 2.5% APR loan. You’ll pay less interest over time with a shorter term loan, but your monthly payments will be higher. Similarly, you’ll pay more in interest over time with a longer loan term, but your monthly payments will be lower. Consider your budget and financial goals to determine which loan term will work best for you.

As you consider lenders, find out if they offer a preapproval process. Preapproval allows you to see the rates you qualify for without a hard inquiry — when a creditor pulls your credit history — which can cause your credit score to slightly dip. It also allows you to review options upfront without having to commit to a particular lender.

How to choose an auto lender

Finding the best auto lender comes down to a few factors, including whether you’re buying a new or used vehicle, whether you’re buying from a dealership or private seller and where you qualify for financing. Some lenders only offer new car loans, while others may only offer used car loans.

And, though dealerships often offer financing, you can explore outside lender options that may save you money. Here are some factors to consider when looking for the best car loan:

New vs. used cars

Buying a new car is almost always more expensive than buying a used car. Not all dealerships sell certified preowned cars, so if you’re looking for a used vehicle, you may find more options through private sellers. When financing a car, you’ll generally receive a lower interest rate on a new vehicle than on a used car.

Loan term

Most care loan terms range from 24 to 84 months, depending on the lender. A longer term gives you more time to pay off your loan and smaller monthly payments — but you’ll end up paying more interest over time. A shorter term comes with higher monthly payments, but will save you in interest. You should weigh how much you can afford each month against when you would like your loan to be repaid to determine the right term for you.

Annual percentage rate

The APR you receive from a lender will depend on your credit history, income, whether you’re buying a new or used vehicle and your loan term. It’s important to shop quotes from different lenders to make sure you’re getting the lowest rate possible. 

Credit score

Your credit score plays a large role in whether you’ll get approved for a car loan and determining your APR. If you have a lower credit score you may qualify for a smaller loan than you originally requested or receive the full amount at a higher interest rate.

Bank vs. dealership loans

You can get financing for a vehicle through a bank, credit union, online lender or directly through the dealership. While both loans work the same way, dealership loans can be more expensive.

That’s because a dealer may offer you a higher interest rate than you might receive by applying directly with a bank. While a dealer will have you apply for the loan and shop around with different lenders on your behalf, some dealers negotiate a higher interest rate with you — and pocket the difference in exchange for helping you navigate the financing process.

This isn’t always the case though. It’s a good idea to shop around with different lenders on your own and compare the rates to dealership financing to make sure you’re getting the best car loan possible.

Buying vs. leasing a car

Whether you buy or lease your car can impact your loan rate and chances for approval. It’s typically easier to get approved for a car lease than a car loan. For instance, you might need a larger down payment or better credit score to get approved for a car loan, while leasing may give you more options if you have less-than perfect credit. 

If you need a car quickly, don’t have time to save for a large down payment or have a lower credit score, a lease might make sense. While leasing a car can be less expensive each month, in the long-term it’s usually more expensive to lease a car than it is to finance and buy one. 

How to get a car loan

  1. Find a vehicle that fits your budget. Take some time to decide if you want a new or used car, weigh your needs and find options that best fit your lifestyle and financial goals.
  2. Shop around for lenders and get preapproved. Next it’s time to find the best car loan rate. Although lenders may advertise similar rates, it’s a good idea to request a personalized quote so you can compare offers between different lenders. Getting pre-approved for an auto loan lets you see the rate and terms you’re likely to be approved for, so you can determine which monthly payment best fits your finances.
  3. Apply for your loan. Once you’ve decided on the right lender and loan terms, it’s time to officially apply. Expect the lender to run a hard credit check during this process. If approved, you’ll move on to the next step.
  4. Get your car. After your loan is approved, you’ll get the keys to your new or used vehicle.
  5. Start loan repayment. Your lender will send you financing information so you can enroll in autopay and make sure you’re set up to start repaying your loan. 

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