Start by knowing your credit score and what you can afford monthly
Before you contact any lender, pull your credit report and score from one of the three bureaus — Equifax, Experian, or TransUnion. You can get this free once a year at annualcreditreport.com. Your score determines which lenders will work with you and what interest rate you'll pay. A score above 700 usually opens doors to better rates; below 620 often means higher rates or fewer options.
Next, figure out what monthly payment you can actually handle. A common rule is that your car payment should not exceed 10 to 15 percent of your gross monthly income. If you make $3,000 a month, that means $300 to $450. Write this number down — it's your ceiling, not a target. Lenders will offer you more than you should borrow.
Check your bank account for a down payment. The more you put down, the less you borrow and the less interest you pay over time. Even $1,000 or $2,000 reduces the loan amount meaningfully. If you have nothing saved, you can still get a loan, but your monthly payment will be higher and your interest rate may be worse.
Key Takeaways
- Your credit score from Equifax, Experian, or TransUnion determines which lenders will work with you and what interest rate you receive.
- Your monthly car payment should not exceed 10 to 15 percent of your gross monthly income, and you should decide this limit before shopping.
- Banks, credit unions, and online lenders all offer car loans, and rates vary significantly — getting quotes from at least three sources takes one to two hours and can save hundreds of dollars.
- Pre-approval from a lender shows you exactly what you can borrow and locks in an interest rate for 30 to 60 days, which gives you negotiating power at the dealership.
- Dealer financing is convenient but often more expensive than outside financing, so compare the dealer's offer to your pre-approval rate before deciding.
Get pre-approval from at least two or three lenders before you shop
Pre-approval means a lender has reviewed your credit and income and told you the maximum they'll lend and at what interest rate. This is not a binding commitment — it's a conditional offer that locks in for 30 to 60 days. Pre-approval gives you two advantages: you know exactly what you can afford, and you walk into a dealership with a competing offer in your pocket.
Contact your own bank first. If you have a checking or savings account there, they may offer you a better rate than a stranger would. Ask what rate they'd give you based on your credit score and income. Write down the rate, the loan term (36, 48, 60, or 72 months), and any fees.
Then contact a credit union if you belong to one. Credit unions often beat banks on rate and fees. If you don't belong to one, some let you join based on where you live or work. Ask whether membership is open to you.
Finally, get a quote from one or two online lenders — LendingClub, Upstart, and Lightstream are common names, but search "car loans online" and you'll find others. Online lenders often move faster than banks and may work with lower credit scores. Each quote takes 10 to 15 minutes and involves basic income and employment information.
Compare the three quotes side by side. The interest rate matters most, but also look at the loan term and any origination fees. A 48-month loan at 6 percent is usually better than a 72-month loan at 5 percent, because you pay less total interest even though the monthly payment is higher. Once you've chosen the best offer, ask the lender to hold the rate for 60 days — most will do this in writing.
Understand the difference between dealer financing and outside financing
When you buy a car at a dealership, the dealer can arrange financing for you on the spot. This is convenient, but it's usually more expensive than the pre-approval you already have. Here's why: the dealer makes money by marking up the interest rate. If your bank approved you at 6 percent, the dealer might offer you 7 or 8 percent and keep the difference.
Bring your pre-approval letter to the dealership. When the dealer offers financing, compare their rate to your pre-approval rate. If the dealer's rate is lower, take it — that's rare but it happens. If it's higher, decline and use your pre-approval. The dealer may push back or ask you to "just see what they can do," but you are not obligated to use their financing.
One exception: some dealers offer special financing promotions — 0 percent for 60 months, for example — but these usually require excellent credit (720+) and a large down payment. If you may have access to and the math works, these can beat outside financing. But don't let a dealer convince you that their offer is the only option.
Decide between a new car, used car, and certified pre-owned
Your loan amount and interest rate depend partly on what you're buying. New cars cost more upfront but come with warranties and predictable maintenance. Used cars cost less but may have hidden problems. Certified pre-owned (CPO) cars are used but inspected and warrantied by the dealer, so they're a middle ground.
Lenders treat these differently. A new car loan often comes with a slightly lower interest rate because the car is collateral that holds its value. A used car loan may carry a higher rate because the car depreciates faster. CPO cars usually fall between the two.
If you're financing a used car, have a mechanic inspect it before you commit. This costs $100 to $200 but can save you thousands if the car has serious problems. Don't rely on the dealer's inspection alone.
Negotiate the price before you discuss financing
Many buyers make the mistake of negotiating the monthly payment instead of the car's price. This is backwards. The dealer can make the payment look good by stretching the loan to 72 or 84 months, which means you pay more total interest. Instead, negotiate the actual price of the car first, then explore your financing to that price.
Research the car's market value using Kelley Blue Book or NADA Guides. Know what similar cars in your area are selling for. Walk in with a target price, not a target payment. Once you've agreed on price, then discuss financing — and use your pre-approval to anchor the conversation.
If the dealer won't budge on price, walk away. There are other cars and other dealers. Desperation at the negotiating table costs money.
Review the loan documents before you sign
Once you've agreed on a car and financing, the lender will send you documents to sign. Read them. Check that the loan amount, interest rate, term, and monthly payment match what you were quoted. Look for unexpected fees — documentation fees, dealer fees, or gap insurance you didn't ask for.
Gap insurance covers the difference between what you owe on the loan and what the car is worth if it's totaled. It's optional and usually costs $500 to $1,000 added to the loan. If you have comprehensive auto insurance, you may not need it. Ask your insurance agent.
If something doesn't match your quote, ask the lender or dealer to correct it before you sign. Don't sign and plan to fix it later — that rarely works.
Frequently Asked Questions
What credit score do I need to get a car loan?
Most lenders work with scores as low as 580 to 620, but rates are much higher at that level. Scores above 700 usually may have access to for competitive rates. If your score is below 620, you may need a co-signer or a larger down payment to be approved.
Should I get a longer loan to lower my monthly payment?
A 72-month loan has a lower monthly payment than a 48-month loan, but you pay significantly more in total interest. If you can afford the 48-month payment, take it. If you can't, a 60-month loan is a reasonable compromise. Avoid 72 or 84 months unless your budget truly requires it.
Can I get a car loan with bad credit?
Yes, but you'll pay a higher interest rate and may need a down payment of 10 to 20 percent. Credit unions and some online lenders are more flexible than banks. A co-signer with better credit can also help you get approved at a better rate.
What happens if I pay off the loan early?
Most car loans let you pay off early without penalty. Paying early saves you interest, so if you have extra money, send it to the lender. Ask whether extra payments go toward principal or are held as a credit — you want them applied to principal when ready.
Is it better to finance through the dealer or my bank?
Your bank or credit union is usually cheaper because they don't mark up the rate. Get pre-approval from your bank first, then compare it to the dealer's offer. Use whichever is lower, but don't assume the dealer's offer is better just because it's convenient.