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How to Get a Car Loan

Updated: Apr 6

Pocketnest #Protip: to get the best rate, check your credit score and shop around for the best deal

Icon of a car on a stack of money

Buying a car can be a stressful ordeal. Between dealing with car salesmen and their "tricks," to the looming car payments that are soon to hit your bank account, we can all agree that getting a new car isn't all sunshine and rainbows.

To help make the process a little less painful (and a little more informed), we've pulled together some quick tips to help you get a car loan faster, easier, and hopefully less expensive—no sweat or tears necessary!

Before you head to the dealership

Turns out, the majority of car shopping happens before you even hit the dealership. Well, kind of. Of course you'll want to scope out and thoroughly test drive your new car before purchasing. But, did you know that much of the pre-purchase work happens before you even step foot in the dealership?

Follow the below steps before you even go to the dealership. That way, you'll be fully financially prepared with your auto loan to be able to purchase your new car.

Check your credit score before you do anything.

Calculated on your credit history and amount of lines of credit (and a couple of other variables), your credit score tells potential lenders how trustworthy of a borrower you are. A good credit score—600 or above—tells them that you'll pay them back on time. A not-so-good credit score—below 600—makes them weary of lending you money and, if they do, potentially at a higher interest rate. Depending on your credit score, you could pay anywhere from 3% to 20% annual percentage rate (APR) on your loan. That's a big difference!

If your score is not optimal, and you can wait to get a new car, we recommend spending a few months boosting your score. That way, it'll be easier and less expensive to get your car loan. (See: How to Build Good Credit.)

Apply for auto loans from multiple lenders

Not all lenders fit the same mold. It's possible to get a better auto loan deal from one lender—think lower APR financing, no prepayment fee, etc.—than another.

Try your current bank or credit union first. They'll likely have a special rate or deals for their customers and members.

Even if they do, it's still good to shop around for other lenders, apart from your bank or credit union. Different lenders look at your credit report differently, so your financing will not necessarily be the same across the board. With quotes from multiple lenders, you'll be able to compare a solid handful of rates and make the decision that's best for you.

Keep in mind while shopping around for lenders that they might not been keen on financing your auto loan with a private dealer (vs. a dealership or broker). Just another quick question to ask when vetting your lenders.

Getting prequalified vs. pre-approved for a loan

Now that you've shopped around for an auto loan, you've likely learned that car loan interest rates can vary.

If you get prequalified for a loan, that counts as a "soft pull" on your credit report. This financing is merely a rough estimate and a range of what your car payment and interest rate would be, based on the personal information you provide.

If you get pre-approved for a loan, this counts as a "hard pull" on your credit report. This financing is a much more accurate estimate of your car payment and interest rate, as the dealer is now reviewing your entire credit report, not just your credit score.

Another big benefit of getting pre-approved for your car loan is that it gives you stronger negotiating power because, now that you already know your interest rate, you're only negotiating the bottom line—the car sticker price versus your monthly payment.

Make sure to get all of your pre-approvals done within a two-week period. That way, these "hard pulls" against your credit will count as one ding. If you space out the pulls, they'll count as individual dings—faring far worse for your credit score.

Set your budget

Once you get pre-approved for your car loan, you'll have an idea of how much money you have to spend on your new car. The amount you're pre-approved to borrow is the total amount, but should not be the cost of the car you buy. Keep in mind you'll have to set aside money for taxes and fees.

Use an auto loan calculator to plug in your downpayment, trade-in value of your car, and lending terms. From there, you can find your monthly car payment. If it's too high, adjust your auto loan to be lower. Remember, that amount is simply what you're qualified to borrow, not what you need to borrow.

When it's (finally!) time to head to the dealership

Shop around for the car you like and fits your budget. Test drive multiple cars, look at new and pre-owned vehicles. This is a big purchase and, after all the work you've already put into the process, there's no sense in moving too quickly when picking out your new wheels.

As you're perusing dealership lots and test-driving all the cars you can get yourself into, keep in mind that your lender might have specifics on what kind of car they'll finance—e.g., excluding electric vehicles or certain brands—which dealerships they work with, and any time restrictions on using the loan.

Last minute haggling tips

Since you're already pre-approved for your car loan, you're technically a "cash buyer," and don't need to finance through the dealership. That way, you can simply negotiate the cost of the car, not the monthly payment (which is based on your APR financing and length of your loan).

Your other option is to tell the dealer that you're pre-approved, and share the amount. Oftentimes, the dealership will want to beat the market price to get your business. In that case, you can end up with an even lower car loan rate!

Buying a car is no small purchase. The work and diligence you've put in ahead of making your big purchase has set you up for financial success.

Now, it's time to negotiate your car insurance! (See: Revamp Your Home and Auto Insurance.) And, of course, take your new whip for a spin! 🚙💨


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