How to get a car loan

Buying a car is a big decision. And it can be an exciting one, too. But figuring out how you’re going to finance a car and how to get an auto loan can feel complicated for anyone—especially if you’re a first-time buyer.

Here are a few things to know about how to get a loan for a car and what you should do before you apply.

Lenders consider credit history and income when they decide whether to offer financing and to determine interest rates. There are other factors, too, such as the age of the vehicle, the mileage on the vehicle and the down payment. But by checking your credit report, you may get a better idea of where you stand.

AnnualCreditReport.com offers free copies of your credit reports from each of the three major credit bureaus. 

There’s also CreditWise from Capital One. It can be used to monitor your credit and access your TransUnion® credit report as often as you would like without hurting your credit. And it’s free for everyone—not just Capital One customers.

When figuring out how much car you can afford, it might be tempting to think only about the monthly loan payment. 

But a car is a large, potentially long-lasting purchase. So it’s a good idea to think about other costs, too, such as taxes and fees. Learning how to avoid monthly payment mistakes could help as well.

Debt-to-income ratio could also affect loan offers. The Consumer Financial Protection Bureau (CFPB) has more information, including quick lessons on how to calculate your debt-to-income ratio and why 43% is an important figure to remember.

There are online tools and auto loan calculators that can help you estimate monthly payments. And don’t forget things like gas, maintenance and insurance. Considering everything could provide a better idea of the total costs of owning a car. 

Auto loans are available from car dealerships, banks, credit unions and other lenders. And some lenders may let you see if you’re pre-qualified for financing. 

You can even use Auto Navigator from Capital One to see in minutes if you pre-qualify for financing, with no impact on your credit score. Auto Navigator allows you to pre-qualify online, search cars and see your financing options—all in one place.*

Pre-qualification can help you get a better idea of what interest rates and loan terms you might be offered. And according to the CFPB, getting pre-qualified for auto financing from multiple lenders might put you in a better position to negotiate the terms of a loan.

Checking your pre-qualification status could trigger a soft inquiry into your credit. But according to the CFPB, soft inquiries won’t hurt your credit score. 

Some lenders may offer financing pre-approval. But that process can be a little different from pre-qualification when it comes to auto financing. Either way, finding out if you’re pre-qualified or pre-approved typically doesn’t mean you’re committing to a loan.

When deciding on auto loan financing, it’s important to consider all relevant factors. For example, a trade-in could reduce the amount of financing needed.

Applying for a line of credit, such as a car loan, can trigger a hard credit inquiry. And according to the CFPB, those kinds of inquiries affect your credit score. 

But the CFPB also says the benefits of shopping around for the best deal on financing generally outweigh the impact on credit scores. And shopping for auto financing in a short amount of time—14 to 45 days, according to the CFPB—could be counted as a single inquiry.

What you need to apply for a car loan

When someone applies for auto financing, the lender will generally ask for some personal information, including: 

• Social Security number or individual taxpayer identification number.
• Current and previous addresses.
• Employment and income information.
• Financial and credit information. 

Getting this information together before applying for financing might help make the process smoother. And doing research and talking to an expert may help you decide what financing option makes the most sense for you.

Common auto loan terms 

When you’re figuring out how to get financing, you might come across some new financial terms, including: 

• Annual percentage rate (APR): APR represents the price of borrowing money—including fees—expressed as a percentage. The higher the APR, the more the borrower will end up paying over the life of the loan. 
• Down payment: This is the payment the buyer makes when purchasing the car. Generally, the larger the down payment, the less money that’s needed for financing.
• Loan term: The loan term refers to the length of an auto loan. The CFPB says shorter terms reduce the total loan cost. On the other hand, longer loans can reduce monthly payments but could result in paying more interest overall.
• Total cost: This refers to how much is paid altogether for the vehicle. That could include the cost of the car, the interest on the loan, and other fees and taxes.

And don’t forget to look at the fine print of any loan agreement. It’s important to know things like what the monthly payment will be and when it’s due each month.

Once you finish the car-buying process, you might not want to think about financing for a while. But it’s important to always make your loan payments on time. Vehicles can be repossessed because of too many missed or late payments. According to the CFPB, payment history is also an important credit score factor. And even the occasional late payment can hurt your score.

Depending on the lender, you might be able to set up automatic payments so that you don’t have to risk a late payment or missing a payment altogether. 

That way you can sit back, relax and enjoy your new ride.