According to data from J.D. Power, Americans paid an average of $46,437 for a new car in January 2023. This figure represents a 4.2% increase from January 2022. Given rising car prices and the fact that many auto loans offer relatively low interest rates, it’s no wonder consumers want to finance their vehicles.
If you’re currently shopping around for a car loan, there’s no shortage of options available. Banks, credit unions, online lenders, and car dealerships may all provide financing. The challenge is narrowing down your choices to find the auto loan that best suits your needs. Here’s how to start.
Check Your Credit Score
Before you begin comparing auto loans, checking your credit reports and scores can be helpful. Understanding where your credit stands can help set your expectations when shopping for a loan: You can likely get a lower rate if you have good credit and no derogatory marks on your credit reports. And a lower rate means paying less money (potentially thousands of dollars) over the life of your car loan.
You can view your credit reports from Equifax, Experian, and TransUnion for free at AnnualCreditReport.com, but you won’t find your credit scores on your reports.
If you want to check your credit scores, you can do so using a free service like Credit Karma or Credit Sesame. Certain credit card issuers, including Chase, Discover, and Capital One, provide free access to your credit scores. There are also a variety of paid services.
Your credit reports and scores are an important part of your financial life. See our picks for the best credit monitoring services to get a clear view of your credit so you can make more informed decisions.
Determine Your Budget
Once you’ve checked your credit score, it’s time to look at your finances. Doing so will help you understand how large a monthly payment you can comfortably afford. In addition to your monthly payments over the loan’s term, you’ll also want to consider the following costs:
- Initial down payment: In many cases, you’ll need to make an initial down payment on your car. Factor this into your total upfront costs.
- Insurance: Car insurance is required in all U.S. states, though coverage requirements vary. Consider your monthly premium costs as you budget for your new vehicle, and keep in mind those costs may increase or decrease depending on the type of car you purchase. Take a look at our choices for the best car insurance to save some time.
- Maintenance: Maintenance costs are an important consideration. If you’re buying a new car, chances are you might not have to worry about significant repair costs for a while. But you’ll still need to change your oil regularly and perform other routine maintenance. If you’re in the market for a used car, it’ll pay off to spend some time researching makes and models that tend to require less maintenance.
- Gas: And of course, you’ll also need to pay for gas. The cost of fuel depends on how much you drive and the type of car you have. Look at what you’re currently spending on gas as a starting point for your new car budget.
To help with budgeting, consider using an auto loan calculator to estimate monthly car payments and determine how your down payment and interest rates may impact costs.
Get Pre-Approved for Multiple Car Loans
After you’ve figured out what you’re comfortable paying for a new or used car, it’s time to shop around for a loan. Comparing loans can help you understand what rates and terms may be available, and it can also help you get the best loan possible for your situation.
Get pre-approved for auto loans with multiple credit unions and banks to compare loan amounts, rates, and terms. Pre-approvals usually don’t affect your credit in any way (be sure to check the lender’s disclosures carefully), but in some cases you may need to complete a full application to see your potential loan details.
While a full loan application will result in a hard credit inquiry and may cause your credit score to dip slightly, the credit scoring companies (like FICO) understand that rate shopping for car loans is common practice. Thus, multiple pre-approvals made in a 14-day window (or up to 45 days, in some cases) will generally only count as one for credit-scoring purposes.
Having pre-approvals in hand will not only help you compare loans but will also give you leverage at the dealership, as we’ll discuss below.
Choose a Vehicle That Fits Your Loan Budget
Before you head to a dealership, it’s important to have an idea of the vehicle make and model you’d like to purchase so you can stay within your budget. Car comparison sites like Kelley Blue Book and Edmunds offer valuable insight into car prices, as well as the potential trade-in value of your current vehicle.
Doing your research ahead of time will help you narrow down your options and make an informed purchasing decision. Plus, you’ll understand if the dealership’s car prices align with current market values.
Compare Pre-Approval Offers to Dealer’s Loan Offer
Loans through car dealers may come with higher rates than direct loans from credit unions and banks, as a way for the dealer to increase its profit. On the other hand, in some cases, dealerships can negotiate lower rates with their partners than you may find on your own. If you have a pre-approval, you may be able to negotiate a lower rate with the dealer yourself, or avoid potential upsells because you’ll have a set budget in mind.
Bring copies of any pre-approvals you receive to the dealership. If the dealer offers you financing, compare the amounts, APRs, and terms to those you’ve received from other lenders. Don’t be afraid to ask the dealer to beat your best pre-approved rate.
Before you sign any auto loan, read the contract carefully. Look for things like the following, which could increase your borrowing costs:
- Hidden fees
- Vehicle add-ons
- Early payoff penalties
- Longer loan terms that could increase the overall cost
Make Your Payments
Once you’re approved for an auto loan, setting up automatic monthly payments can help simplify the repayment process. Many lenders offer online dashboards where you can sign up for autopay or schedule payments from your bank account. Some, like Chase, offer mobile apps as well.
If you get behind on a car loan payment you may incur a late fee, depending on the lender. Multiple missed payments will likely have a large negative impact on your credit score, as auto loan payments are reported to the credit bureaus, and may even put your loan at risk of default. When you default on a car loan, your lender could repossess your vehicle and sell it privately or at a public auction.
What Credit Score Do You Need for a Car Loan?
Different lenders have different minimum credit score requirements for borrowers. While some may require good credit to qualify for an auto loan, others may offer financing for borrowers with poor credit. You’ll generally get lower rates on auto loans if your credit score is good or excellent. Get started by checking out the best car loans for all credit levels.
How Much Income Do You Need for a Car Loan?
The income you’ll need to qualify for a car loan will vary by lender. Before approving you for a loan, most lenders will look at your debt-to-income (DTI) ratio, which measures the amount of monthly debt you have relative to your total monthly income. Some may only approve borrowers with a DTI ratio below 36% or 43%, for example, though requirements vary.
What If You Can’t Make Your Car Payment?
If you’re unable to make your car payment, contact your lender right away. You might be able to work out a new payment plan, pause your payments for a month, or negotiate a lower interest rate to help alleviate your financial burden. Alternatively, you could opt to refinance your vehicle to access a longer repayment term and reduce your monthly payments.
Can You Pay Off a Car Loan Early?
It may be possible to pay off your car loan early, but watch out for prepayment fees. Certain lenders may penalize you for early repayment, so it’s best to review your auto loan documents or contact your lender before you pay off your loan. This will help ensure you can pay it off early without incurring a fee.