How to Get a Car Loan the Easy Way

(Here's what you need to know)
A couple signs paperwork on the hood of a car.

If you are planning to buy a new or used car in the near future and have never before financed such a purchase, you may be wondering how to get a car loan. Even if you have experience with auto loans, you may be wondering how to get the best possible rate. 

To ensure that you get your loan easily and at a competitive interest rate, it is important that you understand your different options and how financing works. By preparing, you will have the knowledge necessary to proceed with confidence. You should also make sure you have an affordable car insurance policy.

Where to Find the Best Lending Agency

Nearly every new and used car dealership you visit will have a partnership with a lending agency. Through these agencies, the dealerships can offer financing options when you purchase vehicles from the dealer lots.

If you show interest in a particular auto, your salesperson may pressure you into checking out how much your monthly payments will be if you finance the auto through them. The salesperson will start by running a quick credit check to ensure that you qualify for a loan and, if so, what rate they can offer you. Typically, the better your credit score, the lower the interest rate you will get.

When the rep presents you with a calculated monthly payment that appears affordable to you, you may be tempted to sign off on the loan and go through with the purchase. However, the terms of the loan and the interest rate the dealership is offering you may or may not be the best rate you can get.

Banks and credit unions will also offer their customers new and used car loans as well as other types of loans. If you come to the dealership armed with the rates offered by the bank for which you have prequalified, you will be able to determine whether the dealership is offering you a good rate.

How to Get a Car Loan with Your Financial Institution

Nearly all banks and credit unions offer a variety of loan options for their customers who qualify. You can speak with a loan officer at your financial institution to request pre-approval on the type of loan that you wish to secure. Once you have pre-approval, you can compare the rates offered with those offered by the dealership where you plan to buy your car.

Keep in mind that most banks do not base their loan rates on your credit score. Rather, they have one posted loan rate and you either qualify or you do not. Loan types to consider include the following:

  • New car loan: These are highly competitive loans requiring a strong credit history. If you default on your loan, your bank may repossess your car.
  • Used car loan: Most banks provide used car loans only for vehicles that are up to 5 or 8 years old. Used car loans usually come at a slightly higher interest rate than new car loans. If you default on the loan, your bank may repossess your car.
  • Home equity loan: This is a good option if you plan to buy a used car that is older than what your bank will allow for a used car loan. It is also an option if you plan to purchase your vehicle through a private seller instead of a dealership. If you default on this type of loan, you can lose your house.
  • Unsecured personal loan: This is your only option if you do not own a home, are buying a used car that is older than what your bank will allow for a used car loan and you plan to purchase your vehicle through a private seller instead of a dealership. Unsecured loans frequently have rather high interest rates and are sometimes hard to qualify for. You may be better off purchasing through the financing offered by a used car dealership.

How to Get a Car Loan with a Dealership

The lending agencies that partner with new-car dealerships will frequently be rather selective when approving loans – and with good reason. If you default on your loan, they can repossess the car. A new car’s rapid depreciation in the first few years will often lead to the financial agency taking a loss, and this is a risk they are not willing to take.

A salesperson at the dealership will typically offer to handle the financing portion of your car loan. They will use your driver license and Social Security number to run a quick credit check and then offer you a rate and show you your financing options. If you have pre-qualified for a loan through your bank, you can compare the rate offered to you with the rate offered by your bank.

If the rate offered by the dealership is only slightly higher (about one tenth of a percentage point), it may be worth it to go with the dealership’s offer, as your paperwork will not be as cumbersome. If the difference is significant, however, you can let them know that you will be financing through your financial institution. The dealership will help you by providing you with the required forms that your bank will need to complete the loan.


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How to Get a Car Loan with a Used Car Lot

Used car lots frequently have lower-priced, lower-quality vehicles than you will find in the pre-owned section of a new car dealership. Many people prefer to buy cars in these lots not only because they are more affordable but also because financing is easier to get. We’ve all seen lots featuring signs that say, “No Credit? No Problem!” or “We Finance Everyone!”

While this may seem like a fantastic deal for someone with a poor credit history, it does come at a price. Typically, the financing offered to those with bad credit will have an extremely high interest rate. As a result, you will end up paying significantly more money for your vehicle than the sticker price.

Consider this: If three people, each with different credit ratings (good, fair and poor) were to purchase a $5,000 used car on a 3-year financing plan, each would end up paying a different total amount. The chart below illustrates the total expected payments based on average financing rates that are available today. These rates are subject to change at any time and can vary from one place to another, so you should not use them as a basis for what your rate will be.

$5,000 Used Car on a 3-Year Financing Plan:

  • Good credit: 4.85% interest rate loan, total payments: $5,383
  • Fair credit: 11.5% interest rate loan, total payments: $5,936
  • Poor credit: 18% interest rate loan, total payments: $6,507

If you have bad credit and desperately need to buy a car, financing one at a high interest rate may be your only option. However, if you can qualify for a lower rate on a bank loan or can hold off on buying a car while you save up for one or work on improving your credit, you can save yourself a lot of money.

Requirements for Financing a New or Used Car

If you are applying to obtain pre-approval on a loan through your bank, you will need to provide the loan officer with your state-issued photo ID or passport, your Social Security number, proof of address (such as through a utility bill that has been mailed to you), proof of income and a completed loan application.

Qualifying for financing through a dealership requires much less in the way of paperwork. You will need to provide only your driver license, Social Security number, current address, the name of your employer and your annual household income. The dealership will use this information to run a credit check and will then present you with a fully completed loan application to sign.

If you finance through the dealership or have a bank-issued car loan, you will be required to carry a car insurance policy that includes comprehensive and collision coverage. That way, if your car sustains damage in an accident, you can have it repaired so that it will continue to maintain a large portion of its value. This is very important to lenders, as your car is your collateral as long as you are making payments on your loan.

If you have financed your car through a home equity or unsecured bank loan, you will not have any insurance requirements beyond the state-mandated minimum liability coverage amounts. However, in the case of a home equity loan, you will need to show proof of homeowners insurance.

Maintain a Good Credit Score

Remember, a good credit score can save you lots of money in the long run. By paying your bills on time and not accruing high levels of debt, you can qualify for better interest rates on loans and credit cards and can even get better rates on your insurance premiums. Our agents can help you compare quotes on the auto insurance you need. You are encouraged to obtain a copy of your free once-a-year credit report.

Good luck and happy driving.

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