How to get a car loan

It’s time to get a new car, but you don’t have a lot of money. You must determine how to obtain a car loan. Getting a car loan, whether new or used, is one of the first things you should take in the car-buying process. It’s easier to break the procedure down into sections rather than trying to handle it all at once. Here’s everything you need to know about getting the best auto loan rates, even if your credit score isn’t the best.

Car Loan Conditions 

Before you start the process of securing a car loan, you should familiarise yourself with the most common terminology you’ll encounter. Whether you go with an online lender such as titlelo Whether you apply online or in-person at a bank or credit union, the following terminology will be crucial to your loan application. Additional meanings of automobile words can be found in the iSeeCars automotive dictionary.

APR stands for annual percentage rate, which is the interest rate a borrower will pay on a loan. It can range from 0% to over 20% depending on a variety of circumstances.

Car Payment: the monthly amount a borrower must pay to retain a loan in good standing; failure to pay or pay late can harm a borrower’s credit rating.

Equifax, Experian, and TransUnion are the three credit bureaus that track consumer credit; a consumer’s credit score should be constant across all three bureaus, although minor variances are possible.

Credit Report: This report, often known as credit history, shows a borrower’s credit and loan activity as recorded by credit bureaus, as well as the borrower’s credit score.

Credit Score: a number that reflects the risk associated with a car buyer’s credit application; also known as a consumer’s “FICO” score.

Down Payment: The amount paid at the beginning of a loan to reduce the overall loan sum; a 20% down payment on a $12,000 car would be $2,400.

Interest is the cost of borrowing money expressed as a percentage rate; for example, a 1% interest rate on a $10,000 loan would cost around $100 in the first year.

Loan Fees: fees associated with obtaining a loan; they are often one-time charges rolled into the total loan principal and can include origination and processing fees.

Loan Term: the amount of time it takes to repay a loan; this is determined at the commencement of the loan and typically ranges from three to seven years, with longer terms necessitating a higher interest rate.

Prepayment Penalty: extra fees for paying off a loan early; these fees rarely apply to car loans and should be avoided if possible so that a borrower can pay off the loan early if desired.

The principal, also known as the loan amount, is the amount of money borrowed; each automobile payment will pay down a piece of the main, as well as the monthly interest charge.

Refinance: While refinancing a home loan is far more popular, refinancing a car loan can result in a lower payment and/or lower interest rate without paying unnecessary costs.

Calculate Your Credit Score

Finding out your credit score is the first step in securing a car loan. This is a numerical representation of your credit history and is also known as your “FICO score.” A free credit report will show you your FICO score. Equifax, Experian, and TransUnion, the three major credit reporting organizations, will each provide a free credit report once a year. Check with your bank or credit card company as another alternative. Many of these businesses will also supply you with a free credit report that includes your credit score.

The credit report comprises not only your current credit score but also a record of your credit history, including any items that are negatively impacting (reducing) your credit score. Any previous automobile purchases will be mentioned, along with the car payment amount, interest rate, and other loan details, as well as the names of the auto lenders. If you’ve ever missed a car payment, the financial institution will almost certainly have reported it to the credit bureau, which you’ll see here.

Don’t be concerned if your credit score is poor. You have the ability to increase the number. To begin, make sure you pay your credit card and loan bills on time, especially any existing vehicle loan payments. Pay off any past-due bills and, if possible, reduce the balance on your debts, particularly revolving credit accounts. You should also avoid opening new accounts because repeated credit bureau queries for new credit can damage your credit score.

An excellent credit score isn’t essential to get a car loan, but it is important if you want to get a low annual percentage rate (APR) on the interest you’ll pay. Consider a co-signer if your credit score is producing a higher APR. If you don’t make loan payments, a co-signer, usually a close relative or extremely good friend, can agree to make them for you, lowering an otherwise exorbitant interest rate.

Obtain a Pre-Approval 

Before visiting the first dealership, you should always get pre-approved for financing. A pre-approval indicates that a lender has thoroughly examined your credit and loan application in order to estimate the loan amount and interest rate you will receive. The lender doesn’t look at your credit as thoroughly throughout the pre-qualification procedure. They’ll still give you an interest rate and a loan amount, but until your loan is officially approved, the actual auto loan conditions you’ll obtain may alter.

Calculate the Amount of Car You Can Afford 

The amount that a lender is ready to offer you and the amount that you can afford to borrow are not always the same. Long before you buy a car, you’ll need to figure out how much you can spend.

Generally speaking, your automobile payment should not exceed 10% of your take-home income, and your total car expenses (fuel, maintenance, insurance, and registration) should not exceed 15% of your take-home pay.

Many websites include a free auto loan calculator that allows you to easily calculate your car payment using the purchase price, down payment and interest rate. Consider how that monthly automobile payment will affect your total budget. If you earn $4000 per month, your automobile payment should not exceed $400, and your total monthly car expenses (including the payment) should not exceed $600. Even if the bank is willing to lend you more, if the loan terms, including principal payment, interest, and any additional costs, are too tight, take out a lesser auto loan.

Consider putting down a deposit

Down payment lowers the amount of money you’ll need to borrow, which lowers your monthly payment. This lowers the total amount of interest you’ll pay on the loan. While this can help make a car more affordable, don’t spend all of your savings. Make sure you have enough cash on hand to deal with any unexpected events.

Is it better to buy new or used?

You have the option of purchasing a new or used vehicle when purchasing vehicle. The reduced likelihood of unexpected repair expenditures is one of the major advantages of new autos. They also include new automobile warranties that cover you for a set period of time. A cheaper interest rate on a new car loan is possible, especially if the manufacturer is offering incentives to sell a specific model. If you have an excellent credit score, you may be eligible for zero percent interest loans. Used automobiles may not be as dependable as new cars, but many now come with manufacturer warranties (CPO) to put your mind at ease. (Learn more about Certified Pre-Owned automobiles and if they’re worth it in our guide.)

Used vehicles can be acquired from either a dealer or a private party. While new automobiles are sold primarily through dealers, who can often arrange an auto loan, used cars can be purchased from either a dealer or a private person. You’ll need to negotiate your own auto loan terms if you buy from a private party, but you’ve already done that, right?

Finally, keep in mind that a new automobile’s depreciation means it loses a lot more value in the first few years following purchase than a used car. This isn’t an issue if you plan to keep your new automobile for the duration of the loan, which is likely to be between 5 and 7 years. However, in addition to interest payments, insurance, and maintenance, the vehicle’s depreciation represents a major ownership expense if you decide to swap automobiles sooner. If you plan to move automobiles every few years, buying cars that are at least three years old will save you a lot of money. Keep in mind that cars depreciate at varying rates, so choosing a vehicle that will maintain its worth the best is a wise choice.

Do your homework 

A car is a significant investment, so do your homework before deciding on a model. Look through online reviews to learn what professionals have to say about the car you’re thinking about buying. It’s also a good idea to look into consumer reviews to check whether others who have purchased your car are happy with it or if they have any dependability issues.

At the Dealership, Take a Test Drive

Make time for some test drives once you’ve narrowed down your options. You must get behind the wheel and drive an automobile, no matter how nice it appears on the internet. This provides you the chance to inspect the interior quality, seat comfort, and general performance of the vehicle you’re considering.

Allowing a salesperson to cut your test drive short is not a good idea. Allow yourself as much time as you require. Also, make sure to drive in the manner you normally do on a daily basis, whether it’s cruising down the highway or negotiating city traffic. If you have children, make sure their car seats are properly installed and that everyone is comfortable. A test drive is your chance to see if the car you’re considering will fit your needs and lifestyle. (To make the most of your test drive, see our advice on What to Look for When Buying a Used Car.)

Outside Financing vs. Dealer Financing – What’s the Difference?

Financing can be obtained in a variety of ways. There’s the dealership, for starters. Dealers frequently interact with a variety of auto lenders and can check with many at once to come up with a loan term, but they aren’t your only option.

As previously said, you can work directly with a bank, beginning with the one that already has your business. Existing customers often get better loan rates but check with other institutions as well.

Finally, credit unions exist. They operate similarly to banks and can provide the same types of loans and terms, but you may need to be a credit union member to obtain a loan. It may be as straightforward as opening a bank account.

Before you make a financing decision, look into all three options: the dealership, banks, and credit unions. Many of these banks will accept applications online, so don’t feel obligated to visit each one in person to receive a loan offer.

Make a deal

Do not feel forced to accept the loan offer made by the dealership. You should be aware that you can typically haggle on the price of a used or new car. There’s a lot of potential for haggling, especially if you had your own finance in place before going to the lot. The purchase price of the car, the value of your trade-in (if you have one), the length of the loan, the loan interest rate, and any additional fees are all factors worth considering (see below). Before you go to the dealership, decide what loan terms you’ll accept and be prepared to negotiate to get the best offer.

Add-Ons to Avoid 

After you’ve agreed to a car’s purchase price, you’ll be ushered into the finance department, where you’ll be bombarded with all kinds of extras that the dealer wants to tack on to your purchase. Everything from extended warranties to car washes to rust-proofing will be included. The list goes on and on. Extensive warranties, for example, are rarely worth the extra money. You are not obligated to accept any of these extras, and you should expect pushy salespeople.

Examine the options carefully, and if you’re persuaded to acquire extras you don’t require, say no. Keep in mind that these add-ons aren’t free and will raise your monthly bill.

Understand Your Loan’s Terms

Make sure you understand all of your loan’s terms and disclosures. Understand the interest rate, the length of the loan, and the final monthly payment. If you see a cost in the loan conditions that you don’t understand, ask for an explanation and don’t proceed until you do. Whether you try to pay off your loan early, check to see if there is a prepayment penalty, and be aware of the costs that may be charged for things like late payments or returned checks.

Make timely payments

Making on-time payments will greatly improve your credit score. To keep your loan on schedule, consider setting up automatic payments. Missed payments might result in hefty fines as well as a drop in your credit score.

Is it a good idea to refinance my current loan? –

Refinancing may be an excellent option if you had bad credit when you first took out your loan and it has now improved. Refinancing, on the other hand, comes with costs. Ensure that the lower interest rate isn’t canceled out by refinancing costs.


Purchasing a car is a significant investment. It’s not something you do every day, and knowing how to finance a car is just as vital as deciding on the correct brand and model for your needs. Take your time determining how much you can afford and securing the best available loan. Budget carefully so you don’t go overboard, and make your auto payments on time to keep your credit score in good shape.

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