Home > Auto Loans > 5 Steps for Getting a Car Loan

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When you are looking to buy a vehicle, the first thing you should do is apply for a preapproved loan. The loan process can seem daunting, but it’s easier than you think. Here are five steps for getting a car loan.

1. Check Your Credit

Before you shop for a loan, check your credit report. The better your credit, the cheaper it is to borrow money. With a higher credit score, you may be entitled to lower loan interest rates, and you may also qualify for lower auto insurance premiums.

Review your credit report to look for unusual activity. Dispute errors such as incorrect balances or late payments on your credit report. If you have a lower credit score and would like to give it a bit of a boost before car shopping, pay off credit card balances or smaller loans.

If you’re credit score is low, don’t fret. A lower score won’t prevent you from getting a loan. But depending on your score, you may end up paying a higher interest rate. If you have a low credit score and want to shoot for lower interest rates, take some time to improve your credit score before you apply for loans.

2. Know Your Budget

Having a budget and knowing how much car you can afford is essential. You want to be sure your car payment fits in line with your other financial goals. Yes, you may be able to cover $400 a month, but that amount may take away from your monthly savings goal.

If you don’t already have a budget, start with your monthly income after taxes and subtract your usual monthly expenses and how much you plan to put in savings each month. For bills that don’t come every month, such as Amazon Prime or Xbox Live, take the yearly charge and divide it by 12. Then add the result to your monthly budget. If you’re worried you spend too much each month, find simple ways to whittle your budget down.

You’ll also want to plan ahead for new car costs, such as vehicle registration and auto insurance, and regular car maintenance, such as oil changes and basic repairs. By knowing your budget and what to expect, you can easily see how much room you have for a car payment.

3. Determine How Much You Can Afford

Once you understand where you are financially, you can decide on a reasonable monthly car payment. For many, a good rule of thumb is to not spend more than 10% of your take-home income on a vehicle. In other words, if you make $50,000 after taxes a year, you shouldn’t spend more than $500 per month on a car. But depending on your budget, you may be better off with a lower payment.

With a payment in mind, you can use an auto loan calculator to figure out the largest loan you can afford. Simply enter in the monthly payment you’d like, the interest rate, and the loan period. And remember that making a larger down payment can reduce your monthly payment. You can also use an auto loan calculator to break down a total loan amount into monthly payments.

You’ll also want to think about how long you’d like to pay off your loan. Car loan terms are normally three, four, five, or six years long. With a longer loan period, you’ll have lower monthly payments. But beware—a lengthy car loan term can have a negative effect on your finances. First, you’ll spend more on the total price of the vehicle by paying more interest. Second, you may be upside down on the loan for a larger chunk of time, meaning you owe more than the car is actually worth.

4. Get Preapproved

Before you ever set foot on a car lot, you’ll want to be preapproved for a car loan. Research potential loans and then compare the terms, lengths of time, and interest rates to find the best deal. A great place to shop for a car loan is at your local bank or credit union. But don’t stop there—look online too. The loan with the best terms, interest rate, and loan amount will be the one you want to get preapproved for. Just know that preapproved loans only last for a certain amount of time, so it’s best to get preapproved when you’re nearly ready to shop for a car.

However, when you apply, the lender will run a credit check—which will lower your credit score slightly—so you’ll want to keep all your loan applications within a 14-day period. That way, the many credit checks will only show as one inquiry instead of multiple ones.

When you’re preapproved, the lender decides if you’re eligible and how much you’re eligible for. They’ll also tell you what interest rate you qualify for, so you’ll know what you have to work with before you even walk into a dealership. But keep in mind that preapproved loans aren’t the same as final auto loans. Depending on the car you buy, you’re final loan could be less than what you were preapproved for.

In most cases, if you are preapproved, you shouldn’t have any problems getting a final loan. But being preapproved doesn’t mean you’ll automatically receive a loan when the time comes. Factors such as the info you provided or whether or not the lender agrees on the value of the car can affect the final loan approval. It’s never a deal until it’s a done deal.

If you can’t get preapproved, don’t abandon all hope. You could also try making a larger down payment to reduce the amount you are borrowing, or you could ask someone to cosign on the loan. If you ask someone to cosign, take it seriously. By doing so, you are asking them to put their credit on the line for you.

5. Go Shopping

Now you’re ready to look for a new ride. Put in a little time for research, and find cars that are known to be reliable and fit into your budget. You’ll also want to consider size, color, gas mileage, and extra features. Use resources like Consumer Reports to read reviews and get an idea of which cars may be best for you.

Once you have narrowed down the car you are interested in, investigate how much it’s worth so you aren’t accidentally duped. Sites such as Kelley Blue Book or Edmunds can help you figure out the going rate for your ideal car. After you’re armed with this information, compare prices at different dealerships in your area. And don’t forget to check dealer incentives and rebates to get the best possible price.

By following these steps, you’ll be ready to make the best financial decision when getting a car loan. Even if you aren’t ready to buy a car right now, it doesn’t hurt to be prepared. Start by acquiring a free copy of your credit summary.

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  • http://www.Credit.com/ Gerri Detweiler

    If your mother is amenable to this arrangement, why don’t you ask her to call the lender and ask them? You certainly won’t be able to do it without her help because she is the borrower.

  • http://www.Credit.com/ Gerri Detweiler

    You’ll need to ask the lender, but I am sure they have procedures for this situation.

  • http://www.credit.com/ Credit.com Credit Experts

    You can, but it’s smart to have an idea of how your credit profile will look to them and what requirements they have for borrowers. Because every credit report inquiry made for the purpose of extending credit can cause a small, temporary dip in your score, you’ll want to be relatively confident your loan application will be approved. Be very careful about multiple applications. Our readers have reported that some scores have suffered significantly. You can get a free credit score from Credit.com, along with personalized advice on improving your score.

  • http://blog.credit.com/ Kali Geldis

    Hi Alex —

    Do you have any specific questions about paperwork we can try to answer for you?

  • Sierra

    If I’m on disability how do I get a loan for a car

    • http://www.Credit.com/ Gerri Detweiler

      Creditors are not allowed to discriminate against income from SSDI. You still have to make enough income to qualify for the loan and meet other requirements (such as minimum credit scores) then the fact that your income comes from disability should not disqualify you from a loan.

  • franki

    if I had a car loan and my car was totaled and the loan paid off from the insurance will that lender give me a new loan or should I apply elsewhere

    • http://blog.credit.com/ Kali Geldis

      Hi Franki —

      Did you miss any payments while waiting on the insurance payout or is there any remaining balance? If not, you’ll likely be able to get another car loan, though it’s always your best bet to shop around to get the most competitive rate. And be sure to check your credit before you apply — it will help determine your interest rate on your new loan!
      https://www.credit.com/free-credit-score/

  • Marquise

    How would I get a car loan for my first car if I have no credit because I’m only 21 but I’ve been wanting to buy this old muscle car from my friends dad? What do I do?

    • Jeanine Skowronski

      Hi, Marquise,

      It could be difficult to get a loan with no credit and, if you do, it’ll probably cost you in fees and interest. You don’t want to wind up with a bill you can’t afford. It may be better to focus on building your credit with a small line (line a secured card) so you can establish a score and also get some experience managing credit before making a big purchase.

      Thank you,

      Jeanine

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