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Getting an auto loan is a process. It's a good idea to check your credit report first to ensure there are no errors.
- You can get auto loans from credit unions, banks, online lenders, or your car dealership.
- Getting pre-approved can help you have more leverage at the dealership.
- Compare offers from lenders and dealerships to score the best interest rate.
- Autos.com can help you find the best interest rate on an auto loan »
If you're ready to purchase a new set of wheels, you might be in need of auto financing. Next to a home, a car is likely one of the most expensive purchases you'll make in your lifetime.
Cars can cost thousands of dollars and vary widely depending on the make and model. Taking out an auto loan can be the best way to get yourself on the road if you don't have the full cost of the car on hand, but how do they work?
We're going to break down exactly how auto loans work and what steps you need to take to secure one.
1. Review your finances
Getting an auto loan is a process. It's a good idea to check your credit report first to ensure there are no errors.
Your credit report can affect your credit score. If you have a low credit score due to errors, it could result in a higher interest rate so be sure to dispute them.
Additionally, review your finances and set a budget for your car purchase. You want to make sure you can afford the monthly payments, given your commitments with other bills like rent, groceries, etc.
2. Research lenders
There are various auto loan lenders out there and you want to find the best one for you. You have a few options:
- Secure a loan with your local credit union or bank
- Secure an auto loan with an online lender
- Secure a loan with an auto dealership
Each of these options will have different rates and terms, but your credit will play an important role in whether you get approved or not and what rate you secure.
When you get a loan through your bank or credit union, you get a lump sum to purchase the car. Then, you pay back the loan based on your repayment term and interest rate. Your monthly payment will vary based on the length of your term and your APR.
Another option is getting a loan from the auto dealership. Many auto dealerships also offer car financing. In many cases, the car dealership may try to beat any offers you've gotten elsewhere, so come armed with some low rates.
3. Get pre-approved
To shop around and get the best rate, you'll want to get pre-approved for an auto loan. Getting pre-approved means that you're approved conditionally for financing. The pre-approval will include the amount you can borrow as well as interest rates and repayment terms.
You can apply for financing with various lenders and get pre-approval by submitting information about your employment and credit. Qualifying and being pre-approved gives you more negotiating power at the dealership.
In order to get started, get your financial information together, such as pay stubs, tax returns, employment info, etc. Having these documents ready can help you fill out the application to get pre-approved for an auto loan.
4. Decide on a car
When purchasing a car, there are two major things to consider: How much you can afford, and the amount of the loan you are offered. Ideally, your budget and the amount for the loan are in the same range, but that may not always be the case.
Once you've set a budget and gotten pre-approved with estimates, you can do your homework on what type of car would suit your needs. You want to compare various makes and models and look at all costs so you can find the right fit for you.
5. Compare loan offers to dealership offer
If you're pre-approved with a bank or online lender, you may have more leverage to score the best rates at the dealership since they want your business. You're also likely to get lower interest rates if you have strong credit.
When comparing loan offers from a financial institution and an offer from a dealership, look at any extra fees, additional add-ons, repayment terms, monthly payment, as well as the interest rate.
Your repayment term will have a direct effect on your monthly payment. So for example, if you have a short repayment term, your monthly payments will be larger. If you have a longer repayment term, your monthly payments will be smaller, but you may pay more interest in the long run.
Additionally, you'll want to check out the APR and account for how much the interest will add to the total cost of the loan.
6. Accept the loan
After reviewing offers, accept the loan with the best offer and repayment terms for your situation. Read the fine print and terms and conditions. Once you accept the loan, you'll receive financing to purchase a car.
7. Buy a car
Once you secure an auto loan, you can go to the dealership of your choice and buy a car. Whether it's used or new, make sure it's an investment you feel good about. Every car's value depreciates the minute it leaves the lot, so consider your purchase wisely.
8. Make payments on your loan
After applying for an auto loan, securing financing, and purchasing a car, now it's time to pay back your loan.
To keep your credit in good shape, you want to make your payments on time. Make sure you know your payment due date, monthly payment amount, and where and how to make payments.
Doing so can help you repay your auto loan and keep your credit in good standing, so you can enjoy your new set of wheels without any financial trouble.
Autos.com can help you get pre-approved for a car loan »
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