Everything You Need to Know About Getting a Car Loan

Purchasing a new or used car is an exciting experience. But securing auto financing can be stressful if you don't understand the process. This comprehensive guide will walk you through how to get the best car loan for your needs.

We'll cover types of loans, interest rates, credit scores, loan terms, lenders, documents required, and much more. Read on to learn car loan best practices to enter the dealer finance office with confidence.

Types of Car Loans

There are a few main types of auto financing options to consider:

• New Car Loans - 2-3% lower interest rates, only available directly from an auto brand dealer
• Used Car Loans - Rates 2% higher than new, available from banks/CUs
• Private Party Loans - Higher rates, more stipulations than dealer financing
• Refinancing - Get a lower rate by refinancing existing auto loan
• Lease - Make lower monthly payments, but don't own the vehicle

New car loans tend to have the lowest interest rates and most incentives. But used car loans are also a smart choice and more affordable.

What Credit Score is Needed to Get the Best Car Loan Rates?

Your credit score is the key factor that determines auto loan qualification and interest rates. The higher your score, the lower your rate.

Here are the credit score tiers for car loans:

• Exceptional (800-850) - Qualify for lowest rates at 3-4%
• Very Good (740-799) - Still get strong approval rates and rates about 4-5%
• Good (670-739) - Decent rates at 6-8% but may require larger down payment
• Fair (580-669) - Approved but with higher rates from 8-12%
• Poor (below 579) - Unlikely to qualify for financing, even with bad credit lenders

Ideally you want a score over 700 to qualify for prime auto lending rates. Check your credit reports and score several months before car shopping. This gives you time to improve it with positive credit habits.

How Long Should Your Car Loan Term Be?

Auto loans typically come with terms between 24 and 72 months. The most common loan lengths are:

• 36 months - Lower rates, pay off car faster
• 48 months - Balance lower payments with total interest paid
• 60 months - Lower monthly payments but pay more interest
• 72 months - Only suggested for very low loan amounts to keep payments affordable

A longer term does reduce your monthly payment. But you pay more interest over the loan. A 36 or 48 month term is recommended to balance obtaining low rates while not overpaying interest.

What Down Payment is Required for a Car Loan?

Down payments on auto loans generally range from:

• 0% - No down payment required but higher rates/payments
• 10% - Minimum for very strong credit on new car purchase
• 15-20% - Recommended amount for interest savings
• 25% or more - Allows approving those with weaker credit or lower income

Putting more money down upfront lowers your loan amount so you pay less interest. It also shows lenders you are financially committed.

Aim for a 20% down payment when possible, which keeps monthly payments affordable while saving on interest charges.

Where Can You Get the Best Car Loan Rates?

Today there are many lending options beyond banks and dealers. Compare rates from:

• Banks - Especially local community banks and credit unions
• Online lenders - Like Lightstream, PenFed, LendingTree
• Dealers - Manufacturer financing often offers good incentives
• Credit unions - Offer low rates and flexible approval standards

With your credit score and desired loan amount, you can easily compare multiple lender rates online. Credit unions and community banks are often the best sources for top auto financing rates.

What Documents Are Required to Apply for an Auto Loan?

When applying for a car loan, most lenders will request:

• Driver’s License - Photo ID proves your identity
• Social Security Card - Validates your SSN with lenders
• Income Verification - Pay stubs or tax returns to confirm your income
• Residence Verification - Utility bills confirm your address
• Down Payment - Funds from checking/savings account
• Dealer Purchase Agreement - Details on car you are buying

Having these documents ready makes for a quicker loan application and approval process. Many lenders allow applying and uploading documents online for added convenience.

Can You Get a Car Loan with Bad Credit?

Those with poor credit scores below 620 will pay higher rates, but auto loans are still possible. Steps that can help you get approved include:

• Get a cosigner - A cosigner with good credit helps offset your score
• Make a large down payment - At least 25% down shows lenders commitment
• Consider a less expensive car - Helps keep monthly payments affordable
• Apply through your bank - An existing banking relationship helps approval odds

Subprime lenders also specialize in auto loans for bad credit borrowers, though rates are usually high. Avoid "buy-here, pay-here" dealer financing as a last resort only.

How Do Car Loan Calculators Help?

Online auto loan calculators are handy tools to estimate your borrowing amount and monthly payments. They factor information like:

• Vehicle purchase price
• Down payment amount
• Interest rate
• Desired loan repayment term

Loan calculators demonstrate how adjusting these variables impacts your overall loan costs. You can find many free car loan calculators online to start estimating payments.

This table shows a sample 36 month new car loan for a $30,000 vehicle with different down payments and interest rates:

Loan Amount	Down Payment	Interest Rate	Monthly Payment
$30,000	$0	6%	$898
$24,000	$6,000 (20%)	4%	$704
$18,000	$12,000 (40%)	2%	$528

As shown, increasing your down payment and securing a lower interest rate significantly reduce your monthly payment.

Other Auto Loan Tips to Save

Beyond rates and terms, a few other tips can help you spend less on your car purchase:

• Know invoice price - Research a car's true dealer cost before negotiating price
• Investigate incentives - Check for special offers like no-interest periods on new cars
• Buy end of model year - Ask for clearance deals on outgoing models
• Limit extras - Avoid expensive add-ons like extended warranties
• Shop around - Compare multiple lender rates to find the best deal

Being an informed shopper is the key to landing the optimal auto loan for your budget and needs.

FAQs

How long will a car loan inquiry impact my credit score?

Auto loan inquiries may lower your score slightly for a few months. But the effect is minor compared to on-time payments which raise your score over time.

Should I pay points to lower my interest rate?

Paying points upfront lowers your rate but doesn't always pay off long-term. Calculate if the upfront costs outweigh interest savings before paying points.

What fees are involved with a car loan?

Common fees lenders charge are origination fees (1-2% of loan value), documentation fees, and title/registration fees. Keep fees low by negotiating or using a lender that caps fees.

Can I get pre-approved for an auto loan?

Yes, getting a pre-approval letter locks in your rate and shows dealers you are a serious buyer. Your final loan amount is adjusted based on the actual vehicle purchased.

Should I opt for dealer financing or secure my own car loan?

Dealer financing can be convenient but usually isn't the lowest rate. Compare options to make the optimal financing decision. Credit unions often offer the best auto loan terms.

The key to a stress-free car buying experience is understanding the ins and outs of auto financing. Now that you know the critical factors like credit score, down payment, loan term and lender options, you can confidently land the perfect car loan.

Follow the tips outlined to choose affordable monthly payments while minimizing interest costs. Use free online tools to estimate payments and determine the right loan amount for your budget.

Arm yourself with car loan knowledge so you can negotiate a great deal and drive off the lot in your new ride!

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