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Many people use car loans to buy a vehicle. You can get a loan from a bank, an online lender, or a dealership, and each one offers payment plans for buyers.
This guide will walk you through the steps to find the best loan for you.
Want to learn more? Read on!
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Understand the Basics of Auto Loans
Car loans help you buy a vehicle by borrowing money. You pay it back with interest over time.
What is a Vehicle Loan?
A vehicle loan is a loan used to purchase a car, truck, or motorcycle. Banks, credit unions, dealerships, and online lenders offer these loans. You agree to repay it over time, with interest added.
Lenders often require that the vehicle be under 10 years old and have fewer than 120,000 miles. Some loans are for new purchases, refinancing, or lease buyouts. Chase Bank only finances cars bought from its approved dealers after a credit check.
How Car Loans Work
Lenders provide financing to purchase a car. You commit to repay this amount, along with interest, over a period. Payments are typically made monthly and cover both the principal and interest.
The annual percentage rate (APR) affects your total cost. Extending the loan term might reduce your monthly payment, but it can increase the total cost due to additional interest. If payments are overdue by 30 days or more, lenders report them to credit bureaus, which negatively impacts your credit scores.
Missing multiple payments may result in fees or vehicle repossession.
Get Your Finances in Order
Good finances are the key to getting a car loan you can manage. Start by knowing your credit and organizing your money.
Check and Understand Your Credit Score
Check your credit score before applying. A good score helps you get better interest rates and terms on a car loan. Scores range from 300 to 850, with categories such as Excellent (781–850) and Poor (501–600).
If your score is in the mid-600s or lower, improve it first.
Get a free weekly credit report at AnnualCreditReport.com to spot mistakes or issues. Your reports don’t include scores, but banks often provide them at no cost. Frozen credit must be unfrozen before applying for financing.
Lenders may use special auto loan scoring models when reviewing your application.
Set a Realistic Budget for Your Car Purchase
Plan your budget based on the car’s price, taxes, and fees. Add 10% to the sticker price to account for additional costs such as taxes and service fees. Think about insurance, too.
Focus on what you can afford monthly, but don’t forget to account for the total loan cost. Use an auto loan calculator to see how payments add up over time. Avoid stretching yourself too thin by including all expenses, such as gas and maintenance, in your plan.
Save for a Down Payment (And Why It Matters)
A down payment reduces the amount you need to borrow. This can lower your monthly payments and total loan cost. Lenders view it as lower risk, which may help you secure a better APR (annual percentage rate).
If you have limited or poor credit, a larger down payment can improve your chances of approval.
Without enough savings, negative equity may become a problem. For example, if you’re trading in a car with outstanding debt, the unpaid balance will be added to your new loan. Research your trade-in value using tools such as NADA or Kelley Blue Book before deciding on a target savings amount.
Manufacturer incentives, such as cash-back offers, could also reduce the upfront amount required.
Calculate Your Debt-to-Income Ratio
Add up your monthly debts, such as rent, credit card payments, and loans. Then, divide that total by your gross monthly income. Multiply the result by 100 to get a percentage.
Lenders often prefer a debt-to-income ratio below 36%. If yours is higher, it may limit the likelihood of loan approval. Focus on paying down debts to improve this percentage and increase affordability for vehicle financing.
Gather the Necessary Financial Documents
Prepare your Social Security number, a valid ID, and proof of income, such as recent pay stubs or tax returns. Lenders will request these to verify your credit history and confirm you can repay the loan.
Bring proof of residence, such as a utility bill or lease agreement. If buying a car, you may also need details about the vehicle, like its VIN, mileage, and sale price. For leases, contact your leasing company to obtain the required paperwork.
Explore Your Loan Options
You can find loans through banks, credit unions, dealerships, or online lenders. Each option has its own pros and cons, so weigh them carefully to fit your needs!
Where to Get a Loan: Banks, Credit Unions, Dealerships, and Online Lenders
Banks offer car loans with fixed rates and terms. Large banks and regional banks often give you options to compare interest rates. Banks may require a good credit score, so checking your credit report first is wise.
Credit unions typically offer lower interest rates than banks. Landmark Credit Union works with more than 500 partner dealerships, making the process easier for many buyers.
Dealerships can offer financing directly on-site. Some, such as Chase Auto Preferred dealers, have nationwide inventories that you can search by price or features. This option saves time but may come with higher rates than those of other lenders.
Online lenders also allow you to apply quickly via their websites or via the Google Play Store and the App Store. They are convenient if you want fast approval or discounted rates from online-only services.
Many online platforms also connect users with multiple loan offers at once, enabling easy comparison of total costs.
Types of Auto Loans: New vs. Used Car Loans, Private Party Loans
New-car loans often offer lower interest rates. Lenders consider new cars to have more value and less risk. These loans may have longer terms, resulting in smaller monthly payments but higher total costs due to interest.
Used-car loans generally carry higher interest rates because used cars depreciate quickly. They may also include shorter terms, leading to faster loan repayment. For private party loans, you borrow money to purchase a car directly from an owner rather than a dealership.
These loans may require stronger creditworthiness and incur additional fees due to higher lender risk.
Pros and Cons of Each Lending Source
Banks often offer stable loan terms with competitive interest rates. You may get lower fees if you have an existing checking account. However, their approval process can be lengthy, and they may require high credit scores.
Credit unions typically offer lower rates than banks and may serve customers with average credit scores. Membership is required, though, which can limit access for some borrowers.
Dealership financing allows quick approvals during the car purchase process. They might even give special rebates or offers on new cars. Still, they often mark up interest rates for profit.
Online lenders let you compare multiple loans fast without leaving home. Some even specialize in motorcycle loans or subprime lending if your credit needs help. Be cautious of hidden fees and unreliable sources online!
Use Tools to Plan Your Loan
Use a loan calculator to see how much you might pay each month. Don’t forget to add up extra costs like taxes and insurance!
Estimate Your Monthly Payments with a Loan Calculator
A loan calculator helps you see your monthly payments before applying. You can enter the loan amount, interest rate, and repayment term to get a clear estimate. Chase’s calculator is one option for quickly comparing rates and terms.
LightStream offers loans ranging from $5,000 to $100,000 with APRs from 6.74% to 15.24%. MyAutoLoan provides similar amounts but with rates up to 29.90%. Tools like these help you plan more effectively and avoid budget surprises!
Understand the Total Cost of the Loan (Not Just the Monthly Payment)
Focus on the full cost of your loan, not just the monthly payment. Longer terms, such as 72 or 84 months, may seem helpful with lower payments, but they increase total interest. This means you end up paying much more over time.
Add about 10% to the car price for taxes and fees when estimating costs. Include principal, interest, taxes, and fees in your calculation. Comparing loan offers helps you understand how much money each option truly costs.
Factor in Additional Costs (Taxes, Fees, Insurance)
Taxes and fees can add about 10% to the car’s price. Sales taxes, registration fees, and title costs all count toward this amount. Always check your state’s rules, as tax rates vary.
Dealers may also charge extra for documentation or processing.
Insurance is another cost you must include. Many lenders need full coverage before approving a loan. Your deductible typically cannot go over $1,000, and the lender must be listed as a lienholder on your policy.
GAP insurance may be worth considering if your vehicle is totaled, but it isn’t available for commercial loans or certain types of collateral.
Get Prequalified or Preapproved
Getting prequalified or preapproved gives you a clear idea of your loan amount—learn how it works and why it helps!
The Difference Between Prequalification and Preapproval
Prequalification gives you an idea of how much you might borrow. It uses a soft credit pull that does not affect your credit score. Lenders look at your income and basic credit information to estimate loan terms.
This step is quick and easy and helps you plan more effectively.
Preapproval goes deeper. It requires a hard credit inquiry, which may slightly lower your credit score. The lender reviews detailed financial information, such as debt-to-income ratios and tax documents.
You receive a firm offer with specific rates and terms upon approval. Preapproval demonstrates to sellers or dealerships that you’re serious about buying.
Benefits of Getting Preapproved
Preapproval helps you plan better. You will know your maximum borrowing amount, interest rate, and estimated monthly payments upfront. This makes setting a car budget easier and avoids surprises later.
It also ensures you focus on cars within your price range.
It also saves time at the dealership. Preapproved buyers can shop confidently and even view online inventory early. Dealers may take you more seriously since preapproval shows strong creditworthiness.
With this advantage, negotiating a lower price becomes simpler!
How to Apply for Prequalification/Preapproval
Start by gathering your documents. You’ll need ID, proof of income, proof of residence, and your Social Security number. Some lenders may also ask about the vehicle, such as the VIN or mileage.
Apply online with banks, credit unions, or auto lenders for prequalification. This provides estimated rates without affecting your credit score. If seeking preapproval instead, expect a hard pull on your credit report.
In many cases, approval details can be sent directly to dealerships.
Shop for the Best Loan
Compare offers from different lenders to find the best deal. Pay attention to interest rates, terms, and any extra charges.
Compare Loan Offers Side-by-Side
Line up all loan offers. Use an auto loan calculator to see monthly payments and total interest side-by-side. Pay attention to the interest rates, loan terms, and total costs each lender provides.
For example, LightStream offers APRs ranging from 6.74% to 15.24%, while MyAutoLoan starts at 6.24%. Auto Credit Express works well for low-credit borrowers but doesn’t list a set APR range.
Watch out for hidden fees or penalties before making your choice. Always factor in taxes, insurance premiums, and other charges when making decisions.
Look at Interest Rates, Loan Terms, and Total Cost
Check the interest rate before agreeing to a loan. Rates range from 4.99% for new cars to 6.39% for older cars, depending on the vehicle’s year and loan term. A lower rate means less money paid over time.
Consider the length of your loan as well. Shorter terms, like 36 months, often have higher monthly payments but save you money on total interest. Longer terms, up to 84 months, may seem easier each month, but cost more due to added interest.
Always calculate your total spend, not just monthly payments!
Watch Out for Hidden Fees or Prepayment Penalties
Review your loan contract for any hidden fees. Dealers may add extras such as extended warranties or credit insurance without disclosing the full cost. Always ask for detailed pricing before signing anything.
Some loans charge a fee if you pay off early, called prepayment penalties. Landmark auto loans don’t have these penalties, so paying sooner can save money on interest. If using one-time guest payments, a $5.95 fee applies.
Choose Your Vehicle and Finalize the Loan
Pick a car that fits your needs and budget. Work with the lender to complete all required steps for funding.
Negotiate the Vehicle Price Before Mentioning Financing
Focus on the car’s price first. Discuss only the amount you will pay for the vehicle itself, not monthly payments or financing terms. Dealers may try to shift attention to financing to make more profit.
Request a final price in writing before agreeing to anything. This includes taxes, fees, and other costs. Check whether any rebates apply, such as military discounts or student offers.
Save financing discussions until after you have finalized the car’s total cost.
Provide Vehicle Details to the Lender
Give the lender key information about the car. Share the Vehicle Identification Number (VIN), mileage, and price. If it is a lease buyout, contact your leasing company for extra paperwork.
The car should meet specific financing requirements. It must be less than 10 years old and have fewer than 120,000 miles. Its make, age, and condition may also affect your loan approval.
Complete the Loan Paperwork
Go through all the loan paperwork with care. Check every detail before signing anything. Do not leave without a signed copy for your records. This protects you from mistakes or changes later.
If the lender asks you to return for new financing terms, read them carefully. Decline and request a refund if they are not acceptable. After everything is complete, the creditor will place a lien on your car title until the loan is fully paid off.
Obtain Auto Insurance (Required by Lenders)
Lenders require you to have auto insurance before approving your loan. They usually require that deductibles be $1,000 or less. The lender must also be listed as the lienholder or loss payee on your policy.
You will need proof of coverage before you can get the car. If the lender added forced-placed insurance, provide proof of current coverage to remove it. GAP Insurance is often available for loans, but not for commercial vehicles or certain types of collateral.
Post-Purchase Loan Management Tips
Set up automatic payments to avoid missing due dates—this saves time and stress. Check loan statements regularly to track your balance and stay in control.
Set Up Automatic Payments
Use automatic payments to avoid missing any due dates. Some banks or credit unions may even offer better rates if you set this up. Processing might take 3 to 4 business days, so plan ahead.
You can pay via Digital Banking, by mail, or at a branch. Set payments from an external account for ease. This keeps your loan on track and protects your credit score.
Understand Early Payoff Options
Paying off your car loan early can save you money. Some lenders charge a fee for this, but Landmark auto loans have no prepayment penalties. This means you can pay an additional amount or settle the full balance without incurring any additional costs.
You can check your payoff amount through Landmark’s Digital Banking. You may also contact their team directly for details. Staying on top of your loan balance helps you plan more effectively and may boost your credit score over time.
Monitor Your Loan Balance and Credit Score
Track your loan balance regularly using tools such as the MyCar dashboard. This helps you see how much you owe and manage payments easily. Late or missed payments can harm your credit score and appear on your credit report.
Check your credit score regularly through services like TransUnion or Equifax. Lenders look at this when offering loans, so keeping it strong is key. Paying on time improves your score, while late payments might lead to higher rates or issues with creditors.
Common Mistakes to Avoid
Skipping key steps can cost you money. Stay alert and plan wisely to avoid regrets.
Focusing Only on Monthly Payments
Low monthly payments can seem appealing. But they often mean longer loan terms, like 72 or 84 months. These terms lower your payments but increase the total cost of the loan.
A car loses value quickly through depreciation. Paying less each month might leave you owing more than the car’s worth. Use a loan calculator to estimate long-term costs, not just the monthly amount.
Financing Add-Ons You Don’t Need
Dealers often try to add extras like gap insurance, window etching, or extended warranties. These can increase your loan costs without providing much value. Request a full list of added items and their costs before signing.
Some dealers might include these add-ons without clear details. Always review the paperwork closely. Decline any you don’t want or need to save money in the long run.
Skipping the Preapproval Step
Skipping preapproval can lead to higher loan costs. Without it, you might face less favorable interest rates or stricter terms. Preapproval helps set a clear budget and gives you stronger negotiation power at dealerships.
For example, Landmark offers preapprovals valid for 60 days, making your shopping smoother.
Missing this step also limits your options. You could waste time looking at cars outside your price range or risk delays in buying the vehicle you want. Taking the time to get preapproved saves money and speeds up the process.
Ignoring Your Budget After the Loan Is Approved
Sticking to your budget after getting a loan is key. If you overspend, it can cause money problems fast. Missed payments can harm your credit score and result in late fees or penalties.
Focus on the total cost of ownership, not just monthly payments. Include auto insurance, taxes, fuel, and maintenance in your plan. Avoid taking on new debts until you’re sure you can manage this one well.
Use tools like online payment trackers or budget apps to stay organized and avoid stress later.
The Bottom Line
Getting a car loan can feel simple if you plan well. Check your credit, set a budget, and explore all loan options. Use tools like calculators to estimate costs and payments in advance.
Take proactive steps, such as preapproval, to streamline the process. With care and focus, you’ll have your car in no time.
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