How To Finance a Car in 4 Steps (2023 Guide)

There are a few proven strategies that will help you to secure a car loan with the best possible rate. These steps should begin even before you determine the car that you want to buy. We’d suggest that you approach your car purchase by following the process outlined below.

Step 1: Check Your Credit Score

Your credit score goes a long way toward setting how much you can borrow and at what interest rate. You need to know where your credit report stands before you apply for any car loan. The good news is that you’re entitled to a free copy of your credit report every 12 months from each of the major reporting bureaus. Head to AnnualCreditReport.com to get your free report.

Credit scores typically range from 300 to 850. To get the best annual percentage rate (APR) on your loan, you’ll probably need a credit score of 661 or higher. If you find that your score is 600 or below, you can learn how to improve your credit score before you apply for an auto loan.

If you have poor credit and need a car, you should consider used vehicles that cost less. Watch out for longer loans that come with lower monthly payments, as they could lead to negative equity. Getting a co-signer on your auto loan could also make it easier to get approved for the full purchase price of your potential vehicle.

APR vs. Interest Rate

APRs and interest rates have different meanings. An interest rate is the cost of borrowing money, while the APR gives you a better idea of the total cost of the loan by including fees and discounts.

APRs will be higher than interest rates because they include upfront fees in your overall car payment. Credit cards mention APRs more often than interest rates because it’s a more accurate representation of what you’ll likely end up paying.

Factors That Affect Your Credit Score

Before you finance a car, take the time to explore the factors that could change your credit score. To get insights on the subject, check out the chart below:

Step 2: Apply for a Loan With Multiple Lenders

You have a lot of choices when it comes to auto lenders. These options for how to finance a car can be broken down into the following categories:

• Large national banks
• Community banks or credit unions
• Online lenders that specialize in auto loans
• Dealerships

Your bank or credit union might give you a preferred rate, so it’s a good idea to apply with them. There are plenty of online financing options for you to compare rates as well. Keep in mind that some lenders put restrictions on where you can buy a car. This is especially important if you think you might buy a vehicle from a private seller.

Step 3: Get Preapproved

Getting a preapproved car loan gives you more negotiating power at the dealership. After you compare interest rates from a few lenders and take advantage of an online car loan calculator, look for preapproval. You could consider getting prequalified instead, but there are some key reasons why the former is generally the better choice.

Prequalification vs. Preapproval

Being prequalified by a lender means that you’re likely to get a loan within a range of rates. Lenders do a soft credit check for prequalification, which involves a limited amount of personal and financial information.

Being preapproved for a loan means that a lender has performed a deeper credit inquiry, known as a hard pull, to determine the loan amount and interest rate you’re likely to receive. This makes you a more serious buyer and provides you with considerable negotiating power when heading to the dealership.

While neither preapproval nor prequalification guarantees approval of your auto loan, both can help you set a clear budget for your vehicle purchase. A car payment calculator can also help drivers understand how to finance a car or refinance a model while sticking to their budgets.

Step 4: Find Your Car and Finalize Your Loan

Once you know how much you can afford and have options in place for how to finance a car, it’s time to find the right vehicle. Some lenders require you to shop from specific dealerships, while others might exclude certain auto manufacturers or vehicle types. Be sure that your lender matches up with the vehicle you’re looking at.

You may find that the dealer offers you an even better finance rate than the one you’ve been preapproved for by another lender. There’s always the possibility that a dealership could give you a low rate or rebates, especially if you add an extended car warranty to your purchase.

Once you decide on an auto loan and have the down payment and trade-in value settled, it’s imperative that you read the contract carefully. Watch out for hidden fees, potential penalties and any add-ons you didn’t request before signing paperwork. Otherwise, the total amount of your loan could end up being far higher than you initially anticipated.