You could just stroll into a dealership and let them set you up with your next auto loan, but that’s just the easy way, and there’s definitely a better way.
Shopping lenders and getting preapproved for an auto loan first will help you get the best rate available — which may, or may not, be from the dealer.
» COMPARE: Car loans for good, fair or bad credit
Follow these steps to get a car loan with the best possible rate.
1. Check your credit report
In addition to your income, your credit report will determine how much you qualify to borrow — and at what rate.
So whatever you do, don’t apply for an auto loan without checking your credit report. If any information on your report is wrong, such as fraudulent activity, you could be denied or offered only a very high interest rate.
You’re entitled to a free copy of your report every 12 months from each of the major reporting bureaus (Equifax, Experian and TransUnion). Many banks and online services — including NerdWallet — also provide free online credit reports and scores.
Get any errors on your credit report fixed before you apply for a car loan.
If you find errors or evidence of fraud when you check your credit report, get them fixed before you apply for a car loan.
If your credit is subprime or poor — typically a score of 600 or lower — and you don’t absolutely require a car right away, consider spending six months to a year polishing your credit before you apply. Making payments on time and paying down credit card balances can help bolster your credit so you can qualify for a cheaper loan.
2. Shop for auto loans
Once you understand your credit situation, it’s time to check out auto loans and lenders, which can come in the form of:
- Large national banks, such as Bank of America or Capital One
- Local community banks or credit unions
- Online lenders that only provide auto loans
- Dealership financing, or “captive” lenders
You’ll want to compare quotes from the first three types of lenders now, even if you plan to take dealership financing eventually. Your own bank or credit union may give you a preferred rate for being a customer, so also check with them. You can also compare auto lenders online.
If you want to buy your car from a private party, rather than a dealer or broker, make sure that’s allowed by each lender you consider seriously. Some restrict where you can buy your car from.
Here are some important financial terms you might encounter as you shop:
3. Get lending offers
Once you’ve narrowed it down to a few lenders, it’s time to apply for and compare offers. Getting lenders to compete for your business ensures you’re getting the best rate because each one weighs factors in your credit report differently. This means car loan offers can differ wildly.
Some lenders offer pre-qualification, which requires a “soft” credit pull, and others provide preapproval, requiring a “hard” credit pull, temporarily lowering your credit score. Pre-qualification can help you get a sense of the rate you might get, but preapproval sets your rate and loan limit and offers more protection at the dealership.
Apply to all preapproval lenders within 14 days to reduce the impact on your credit score.
You’ll need to provide some personal details to lenders, including your Social Security number, for preapproval. It’s important to apply to all preapproval lenders you’re considering within 14 days, because multiple hard credit inquiries within a short time count as just one.
Keep in mind that preapproval is not the same as pre-qualification. If you’re really ready to buy your car, getting preapproved for an auto loan offers several advantages. With pre-qualification in particular, keep in mind that your results will only be as accurate as the data you provide — and be prepared that your final rate may be higher than the initial offer.
|Shopping auto loans: preapproval vs. pre-qualification|
|Preapproval means a lender has reviewed your credit report (not just the score) and other information to determine a loan amount and rate you’re likely to receive.|
Preapproval quick facts:
|Pre-qualification means you're likely to receive a loan at a given rate (or within a wide range) based on limited personal and financial information. It's not an offer to fund you.
Pre-qualification quick facts:
Once you apply, you’ll probably be contacted by multiple lenders, or even dealers. If you don’t want to deal with that or share your real number, you can set up a separate email account and Google voicemail number and check messages at your leisure.
4. Set your (very responsible) budget
Your preapproval offers will state the maximum amount you can borrow, but that’s not the price of your next car. Set aside about 10% for taxes and fees, and then use an auto loan calculator to work in your down payment, trade-in value and lending terms to see what your monthly payment will be.
» SIGN UP: Check your car’s trade-in value
If that payment is too much for your comfort, remember that the preapproval offer is just a limit — you can borrow much less if you choose. It’s far more important to be able to make your loan payments comfortably — even if the bank says you can afford more.
5. Find your car
Now that you’ve got financing offers and have figured the maximum cost of your car, it’s time for the fun part: picking out your new ride.
To avoid disappointment once you have your heart set on a car, be sure to check the fine print of your loan offers for:
- Excluded brands. Some lenders exclude certain car manufacturers from funding.
- Dealership requirements. Some lenders, such as Capital One, require you to shop through a specific network of dealers.
- How the lender will send the money if you’re planning to buy from a private seller.
6. Consider the dealer’s offer
With a preapproved offer in hand, you can see if the dealer can beat that rate.
Once you’ve taken a test drive and have (hopefully) fallen in love with a car that meets your needs, you may still have a shot at an even better interest rate — from the dealer.
Carmakers set up their own banks exclusively for auto purchases through dealerships, and they offer the lowest interest rates. Once the finance manager finds out you’re preapproved for a set rate, he’ll likely try to beat that rate to get your business. There’s no harm in applying to see how low your interest rate can go.
And if you don’t want to play that game, still be sure to tell the salesperson you’re already preapproved. This is like being a “cash buyer,” so you can haggle on just the price of the car, not the monthly payment.
7. Choose and finalize your loan
If the dealership beats your preapproved rate (and the other terms are the same), congratulations — you can rest assured you got a great financing rate. You can take that loan and disregard your other offers. Just be sure to read the contract before signing, to confirm there’s nothing sneaky in the contract, like:
- Hidden fees. In addition to the cost of the car, you will pay sales tax, a documentation fee and registration costs. Question any additional fees.
- A longer loan term. Depending on the APR, adding even 12 months to your loan term can cost hundreds more. Watch out for a better dealership rate at the expense of a longer loan.
- Add-ons you didn’t ask for, like gap insurance, which you can usually get cheaper elsewhere.
- An early payoff penalty. Most auto lending contracts don’t have this, but it’s best to check.
If you do use your preapproved offer, follow the lender’s instructions to complete your loan application and finalize funding. In some cases a representative from the dealer may contact the lender to initiate funding and in others you follow up with the lender yourself.
If you’re buying a car from a private seller, they’re likely to request cash or a cashier’s check. Once you’ve selected the car, you’ll need to go back to the lender and ask how to finalize the transaction. Then, you’ll sign the paperwork. It’s still a good idea to check the contract for the items above, but you’re much safer from these add-ons when you avoid a dealership.
8. Make payments
After the transaction is complete, you’re ready to drive off into the sunset — just don’t forget to make payments on your car loan.
You may receive a book with coupons to tear out and send with each loan payment through snail mail. You can also expect to receive a login for a web portal where you can manage your personal information and make payments or sign up for automatic payments. If you sign up to autopay, you might even get a small break on your loan payments.