How to Get a Car Loan
- To get a car loan, you’ll need to set your budget, gather necessary documents and apply for the loan.
- Lenders typically ask for documents that prove your identity, income and residence.
- You can save thousands by shopping around for a loan and getting offers from several lenders.
How to finance a car
1. Figure out what you can afford
The first step in getting a car loan is calculating how much you can borrow. Use a car affordability calculator to see how much you can afford to spend.
Follow the 20/4/10 rule to make sure your monthly payments are affordable. That means making a 20% down payment, choosing a repayment term of four years or less and spending less than 10% of your monthly income on car-related costs.
Maintenance and repairs: Average of $1,160 per year
Insurance: Average of $2,101 per year for full coverage, $829 for minimum coverage
Fuel: Average of $2,449 per year, according to the U.S. Bureau of Labor Statistics
Taxes and fees: 8% to 10% of the cost of the car when you buy it
Read more about how much it costs to own a car.
2. Gather your documents and information
Most lenders ask for documents to prove that you’re the person applying for the car loan and that you have enough money to make loan payments.
Collect these documents before you apply for your car loan to make the process go faster.
Proof of identity (e.g., a driver’s license, passport or U.S. visa) Proof of income and employment (e.g., pay stubs, bank statements or W-2s) Proof of residence (e.g., a driver’s license, utility bill, mortgage or lease agreement) Personal information (e.g., your Social Security number, address and birthdate)
Read more about all the documents you need to get a car loan.
If you’re just shopping around for a loan, that’s all you’ll need for now.
But if you’re ready to buy your car, you’ll also need to give your lender specific information about the car you’re buying and show proof of car insurance before you can drive off the lot.
3. Shop around
Now that you know how much you can afford to spend and have your documents ready, it’s time to find a lender. Here’s how to do it.
Prequalify
Many lenders allow you to check your potential car loan rates without damaging your credit. This process is called prequalification.
You’ll need to share personal information about yourself, like your date of birth, address, income and employment. You’ll also need to share details about how much you plan to borrow and the type of car you’re buying.
Once you’ve checked your rates with several lenders, you can submit a formal application. You’ll likely need to submit the documents you gathered. The lender will also do a hard credit pull, which will ding your credit by a few points.
Get preapproved
You can also get preapproved for a car loan. The lender will pull your credit history and give you a more accurate offer upfront. Car loan preapproval acts like cash at the dealership, which can give you more power when you’re negotiating the final price of your car.
Get multiple offers
Whether you decide to prequalify or get preapproved, make sure to shop around to get the lowest car loan rates.
Borrowers can save $5,198 on average by shopping around for the lowest car loan rate on LendingTree.
Here’s how it works: You’ll fill out a simple form with information about yourself, your loan and the car you want to buy.
If you qualify, we’ll send you offers from up to five lenders. Choose the offer with the lowest rates and best terms to save money on interest.
How to save money on your car loan
Get lower rates
The best way to get a cheaper car loan is to get lower rates. You can do this by shopping around and comparing offers until you find a rate you can afford.
Adding a cosigner on your car loan can also help you qualify for lower rates. However, you should know that the cosigner will need to have good or excellent credit for you to get better rates, and they will be on the hook if you stop making payments on your car loan.
If you have time before you need to buy a car, improving your credit score is the best way to get lower rates on your car loan.
The average new car loan rate for borrowers with excellent credit is 5.08%, while the average new loan rate for borrowers with bad credit is 15.43%.
Borrow less
You can lower your monthly car payment by borrowing less money to begin with. Two common ways to borrow less for your car are making a big down payment or buying a used car.
You can also negotiate the price of your car at the dealership, but keep your expectations reasonable. You may be able to save hundreds of dollars with good negotiation skills, but buying used or putting down a large down payment will be more effective ways to save big on your car payment.
Choose a shorter loan term
Whenever possible, follow the 20/4/10 rule and choose a car loan term of four years or shorter. Choosing a shorter car loan term typically means saving money on interest payments.
Keep in mind that while you’ll save money over the course of your loan term, your monthly payment will be higher in the short term. Make sure you can afford your monthly payments. Otherwise, your lender can repossess your car and your credit will take a hit.
Experts weigh in on Reddit’s car loan questions
“I’m about to buy a car for about $24,000, and I only have about $6,000 that’s liquid and available for the down payment. I was going to go with a 72-month loan from the dealer, making my monthly payments around $360. Whenever I have extra cash I plan to dump it toward the car loan, hopefully reducing the length of the loan significantly.
Would like to hear about what mistakes I may be making with my proposed strategy, or what other options I should be considering.”
*Reddit post has been edited for brevity and style.
Our advice: Instead of going to the dealer and asking to be matched with a loan, get preapproved offers from several lenders beforehand to make sure you’re getting the lowest rates you can qualify for. Otherwise, you could be leaving money on the table.
In particular, be sure to check with credit union car loans — they tend to come with low rates, making them a great starting point for finding a cheap car loan.
Just make sure to get all of your offers within a two-week period. All credit pulls for car loans in that shopping window will only count as one hard credit inquiry.
Another point to consider is that though long-term loans tend to come with smaller monthly payments, they may also come with higher interest rates. It can be tough to balance when you have a tight budget, but keep the 20/4/10 rule in mind.
Check if your budget has the wiggle room for a larger monthly payment and, if not, consider taking the time to save up for a larger down payment.
Frequently asked questions
Lenders determine what rates to charge you based on your credit score and debt-to-income ratio. The higher your credit score and the lower your debt-to-income ratio, the better rates you’ll qualify for.
Not sure what score you have? You can check your score for free with LendingTree Spring. Checking your score won’t affect your credit.
Get auto loan offers from up to 5 lenders in minutes
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