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 money you can borrow. Use a car affordability calculator to see how much you can afford to spend on a car.
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.
- Annual cost of car ownership: $4,507.11
- Annual cost of car insurance: $2,096
- Annual fuel costs: $1,748.23
- Annualized sales tax: $276.17
- Annual car repair costs: $387.03
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 on a car and have your documents ready, it’s time to find a lender. Here’s how to do it.
According to Kelley Blue Book (KBB), tariffs could add another $6,000 to the price of new vehicles that are priced less than $40,000.
While used cars aren’t directly affected by tariffs, there will likely be higher demand and, thus, an increase in used vehicle pricing.
Prequalify
Many lenders allow you to check your potential car loan rates without damaging your credit. This process is called prequalification. Prequalification is an estimate for financing from a lender based on information provided by a potential borrower. While you may see financing terms from a prequalification offer, they are subject to change as you go through the process.
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 money you plan to borrow and the type of car you’re buying.
Once you’ve checked 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, which is the next step beyond prequalification. A preapproval lets the car seller know that you will likely be able to get financing to purchase the car. The lender will do a deeper dive into your history, using a hard credit pull to give you a more accurate offer upfront. You could get a preapproval letter for a loan that is valid for several months, allowing you to compare rates from lenders and dealerships.
Neither a preapproval nor a prequalification will guarantee you will be approved for the loan. You still need to submit a formal application to obtain loan approval and review the final terms.
Arming yourself with a preapproval or prequalification offer allows you to compare rates with the terms the dealer’s lenders may have to offer you.
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 $2,346, 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 lock in a low interest rate. 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 good or excellent credit to help you 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 4.88%, while the average new loan rate for borrowers with bad credit is 15.85%, according to Experian.
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 by making a bigger down payment or buying a used car with a small car loan.
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 a used car or making a large down payment will be more effective ways to save big on your car payment.
Choose a shorter loan term
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. Make sure you can afford your monthly payments. Otherwise, your lender can repossess your car, and your credit will take a hit.
Frequently asked questions
Car financing works like most other loans. You’ll pay the loan back in equal monthly payments for a predetermined repayment term. In exchange for giving you a lump sum of money to pay for your car, the lender will charge interest.
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.
A good car loan rate depends on your credit score. The lowest rates on the market at the time of publication are about 3.39%, while many lenders offer starting rates of slightly above 5%. Keep in mind that these rates go to borrowers with excellent credit, so expect to pay a higher interest rate if you have fair or bad credit.
Not sure what score you have? You can check your score for free with LendingTree Spring. Checking your score won’t affect your credit.
In addition to the basic personal and income information you need to prequalify, for the final loan qualification, the lender will likely ask for more detailed information, including proof of income such as pay stubs, W2s or tax returns; proof of insurance; new vehicle information; and any trade-in information.
Get auto loan offers from up to 5 lenders in minutes
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