Find the right financing for your budget by comparing lenders before you hit the dealership.
Comparing car loans from different providers is one of the most important parts of the car-buying process. Taking the time to get preapproved from a few lenders before you hit the dealership can help you get the most competitive rates and terms available to you.
1. Check your credit
Your credit score determines how much you can borrow and at what rate. This means knowing your credit before you start the loan application process will help you understand when you’re getting a good deal — and when it’s best to find another lender.
You’re entitled to one free credit report each year from each of the three main credit bureaus: Experian, Equifax and TransUnion. Request your report and check it over for any mistakes. When you’re finished, see if you can find a copy of your credit score — your credit card statements and a few online sources may give you a free update. Depending on what your score is, you might want to take steps to improve it before applying for a car loan so that you can qualify for a competitive rate.
2. Apply for preapproval from multiple lenders
Once you know your credit score, it’s time to start researching your options. Banks, credit unions, online lenders and dealerships all offer car loans, but rates and terms can vary widely between them. Create a list of lenders that accept borrowers with your credit score and who offer a loan that suits your needs. For example, if you already have a car in mind, you’ll want to find a lender that will be able to lend the full amount you need to buy the car, including taxes and other fees.
Before you fill out the application, make sure you meet the minimum eligibility criteria set by the lender. You should be able to find this information on the lender’s website or by calling customer service. After you’ve confirmed you qualify, gather the information and documents and start the preapproval application. You’ll generally need your personal, financial and employment details. While some might ask for information about the car you want to purchase, this isn’t always required.
Applying for preapproval shouldn’t take much time. And because of recent changes to how credit bureaus classify loan applications, it will only count as one line on your credit report — provided you apply for preapproval with multiple lenders within a 14-day period.
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3. Compare your different preapproval offers
After you’ve collected a few preapproval offers, compare your options by looking at the following features:
- Loan amount. The loan amount you qualify for will impact how expensive of a car you can ultimately buy. If a lender is unable to offer you a loan that covers the anticipated cost of your car, you may want to cross it off your list.
- APR. The annual percentage rate (APR) is how much your loan will cost over one year as you repay principal, interest and fees. Loans with a lower APR tend to cost less, but you’ll still want to account for how much you can actually borrow and the loan term before settling on the lender with the lowest APR.
- Loan term. The length of your loan will have a big impact on how much you actually end up spending. A 60-month term is typically recommended for new cars, while a 36- or 48-month term is better for used cars. And while shorter terms will mean larger monthly payments, you may end up saving thousands in interest over the course of your loan.
- Restrictions. If your lender has restrictions on how you use your loan — how old your used car can be, for instance — take note of them. This can guide you toward a more flexible loan that won’t prevent you from buying the car you want.
- Preapproval period. Car loan providers typically offer preapproval for 30 to 45 days, giving you a chance to shop around for your car. This is standard, so make sure your lender has a preapproval period that allows you to shop and compare options.
This should help guide you toward the loan that best fits your needs — but don’t commit yet. Just keep the preapproval period in mind while you shop for your car.
4. Create a budget
Use your preapproval offers to create a budget. Our auto loan calculator can help you determine what your monthly repayments would be based off your quoted APR and loan term. But remember: If your monthly payment is too high, you can always borrow less to make your loan more affordable.
In addition to your monthly car payment, you’ll also want to account for upfront costs that come with buying a car, including taxes, fees and your car down payment. Experts recommend having up to 20% of the car’s value saved up before you purchase. If you only have $4,000 saved, then it’s a smart move to only shop for cars that are worth $16,000. This way, you avoid overspending and becoming upside down on your car loan.
5. Start shopping for your car
After you’ve calculated how much you can spend and have a few loans to choose from, shop for your car. Going online is a great first step, since you can compare dealerships’ advertised options against sources like Edmunds and Kelley Blue Book. You should also note lender restrictions. Some car loan providers — especially large banks — require you to shop with one of their dealerships. Others might have age and mileage limits on the type of used car you can buy.
6. Check the dealership’s financing
You’ve selected a car and have a lender in mind. So why check the dealership’s financing? Because dealerships mainly make money based off loans — which gives you the upper hand in negotiation. Depending on your credit and financial situation, you may be able to score an even lower rate with the dealership. To get your business, the salesperson will likely try to beat the rate you already have through your preapproval offer.
But if you don’t want to go with the dealership and aren’t the negotiating type, you should still mention that you’re a cash buyer and already have financing. This allows you to skip some of the sales pitches and gives you a way to negotiate the car’s actual price, rather than just the potential monthly payments.
7. Finalize your loan and receive your funds
Whether you choose to accept the dealership’s offer or simply go with the loan you’ve already been preapproved for, you’ll need to follow the lender’s instructions to finalize your loan.
If you opt for financing from a third-party lender, your loan funds will be transferred in one of two ways:
- Sent to you so you can pay the dealership
- Sent directly to the dealership
If you opt for dealership financing, you’ll simply have to sign some paperwork to finalize your loan.
8. Plan for paying off your loan
You’ve locked in your loan terms and bought your car. Now it’s time to focus on repayments. Many lenders allow you to set up automatic repayments, sometimes with the added benefit of an interest rate discount. But if that’s not your style, you should also be able to make payments manually, either online or by check. Whatever you choose, be sure you have enough to cover the amount due each month. A history of on-time payments can build your credit score, while missing even one can lower it by a few points.
After you increase your credit score, you may also want to consider refinancing your car loan to potentially score a lower rate and save money for the remaining term of your loan.
Checking your credit, creating a budget and getting preapproved with a few lenders can up your bargaining power when you hit the dealership. You can learn more about how car loans work and compare other lenders with our guide.