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Getting an auto loan can be a fast process. If you meet credit requirements, you could likely walk into a dealership and drive away with a car and loan today. But taking the fast track when financing a car isn’t always a good idea.
Allowing time to walk through certain steps can help you find the best auto loan option with the lowest rate for your financial situation.
1. Check your credit report and credit scores
Before applying for an auto loan, get a copy of your credit report. You’re entitled to a free copy of your report every 12 months from each of the major reporting bureaus (Equifax, Experian and TransUnion) at AnnualCreditReport.com. (Due to COVID, you can now request a copy of your credit report weekly through December 2023.)
Lenders will use your credit report to see how well you’ve managed credit in the past, so it’s a good idea for you to review it first. Look for errors — such as late payments that weren’t actually late or fraudulent accounts you never opened. If you find such errors, file a credit report dispute to correct them before you apply for a car loan.
A credit report is the raw material used to calculate your credit scores. Both the report and scores play a role in what interest rate you receive, the maximum amount you can borrow and whether you’re approved for a loan at all.
You will want to know your credit score ahead of time, but a credit report from the credit bureaus doesn’t usually include it. You can often get your credit score at no cost through your bank, a credit card issuer or a personal finance company — including NerdWallet.
When approving auto loans, many lenders use special credit scoring models that emphasize a person’s payment history for previous auto loans. These models are slightly different from the two main FICO and VantageScore credit scoring models.
After you know your credit scores, check the average car loan interest rates for borrowers with a similar credit score. This information provides a general idea of what rates to expect when you start applying for loans. However, other factors specific to you, such as your credit history, will determine your actual rate.
In addition to credit requirements, you'll need to meet minimum income standards and show a stable work history, so track down a pay statement as proof of that.
2. Shop auto loans with more than one lender
Once you’ve checked your credit and gathered income information, determine where you want to apply for an auto loan. Here are some options to consider for financing a car:
Large national and regional banks.
Local community banks or credit unions.
Online auto lenders with no branch locations.
Aggregators that match borrowers to loans within a network of lenders.
Online car retailers like Carvana that have in-house financing when you purchase a car through them.
Dealership financing, which could be loans through a local bank or an automaker (called captive financing).
Even if you intend to apply for a loan through a dealership or online retailer, get loan offers for comparison from a bank, credit union or online lender. Your own bank or credit union may give you a preferred rate, especially if you agree to automatic loan payments from a checking account there. You can also compare auto lenders online.
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3. Get preapproved for an auto loan
Once you’ve narrowed your search to a few lenders, it’s time to get loan offers with interest rate quotes for comparison. Lenders weigh factors in your credit report differently, so rate offers can vary greatly from lender to lender. Also, if you’re able to let lenders know they’re competing for your business, it may help you get a better rate.
When you submit your initial loan application, some lenders may respond with pre-qualified offers and some with preapprovals. These are different, and it's important to know what each one means.
Pre-qualification provides an estimate of the rate and loan amount you might qualify for, based on limited information the lender has about your credit history. It requires only a soft credit pull, so it won’t lower your credit scores. Pre-qualification is a useful tool, but the estimated rate you’re given could change considerably once a full credit check is done.
Getting auto loan preapproval is your ultimate goal. It’s a step up from pre-qualification and requires a hard credit pull, temporarily lowering your credit scores. Because the lender has more information about you and your credit history, the estimated rate should be closer to the final rate you receive upon loan approval. Some lenders do gather enough information upfront to go straight to loan approval, which also results in a hard credit pull.
When applying to lenders that do a hard credit pull, try to make all applications within a two week timeframe. That’s because multiple credit inquiries close together typically count as one and have less impact on your credit scores.
Neither pre-qualification nor preapproval are a guarantee that your auto loan will be approved, but both can help with comparing loans and budgeting for your car purchase.
4. Use your loan offers to set a budget
Your loan offers will show the maximum amount you can borrow, the interest rate and an estimated monthly payment. Use an auto loan calculator to try variations on your loan offer. For example, input different car prices, down payment amounts, loan terms and rates to see how they change the monthly payment and total interest you pay.
You may decide to borrow less than a lender says you can, if it means a more manageable car payment. Determining your own maximum will help you set a budget for how much to spend on a car. When setting a budget, allow an additional 10% to cover taxes and fees.
5. Find your car
Now that you have financing offers and a maximum car price in mind, it’s time to choose a car.
To avoid disappointment once your heart is set on a car, be sure to check loan offers for any lender requirements, like:
Excluded brands. Some lenders won’t finance certain types of cars, such as discontinued models or cars made by specific manufacturers.
Dealership requirements. Some lenders require you to shop through a specific network of dealers.
Private-party restrictions. If you intend to buy a car from an individual, make sure the lender offers private-party loans.
Time restrictions. Most lenders give you 30 days to move forward with a loan offer. Before you run out of time, call the lender to extend the offer.
6. Select and finalize your loan
If you decide to buy a car at a dealership or online car retailer, don’t skip applying for financing there too.
Car manufacturers sometimes offer financing with below-market interest rates for their brands purchased at a dealership. Online retailers typically have their own financing and access to a network of lenders, but most allow you to bring your own financing.
Be sure to mention that you have preapproved loan offers, and ask if the dealer or online retailer can beat your lowest rate. There’s no harm in asking to see how low your interest rate can go.
» RESOURCE: NerdWallet guide to buying a car
When you have all loan offers, compare all details and select the best one. An auto loan calculator can help with this final step, too. For example, it might appear that a loan with a lower monthly payment will cost less. But when you put information in a calculator, you might discover the loan has a longer term and will cost much more in total interest.
If you go with dealership or online retailer financing, you can just disregard your other offers. Paperwork will be handled for you, but be sure to read your financing contract before signing. Confirm there are no unexpected fees or add-ons you didn’t agree to, like gap insurance.
If you use a bank, credit union or online lender offer, follow the lender's instructions to complete your loan application and finalize funding. In some cases, a dealership representative will contact your lender to initiate funding.
If you’re buying a car from a private seller, your lender will work with you to disburse funds to the individual and pay off the balance of any previous loan.
Your final step could be delaying a car purchase
These steps for how to get an auto loan are meant to help you find the lowest interest rate you can qualify for. If a lender sees a history of late loan payments or a low credit score — generally defined as the mid-600s or below — you may be approved only for a very high interest rate or not approved at all.
In this case, if you don’t absolutely require a car right away, consider spending six months to a year improving your credit and apply again. Paying down other debt balances and making payments on time can help bolster your credit so you qualify for a better loan.