How to Apply and Get a Car Loan in 7 Steps
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Walking into a car dealership or bank to get an auto loan can feel overwhelming when you don't know what to expect. Thoughts of potential rejection or ending up with high payments due to inadequate preparation can add to the stress.
You might wonder, “Is it hard to get approved for a car loan?” The answer to this question largely depends on your financial situation and how well-prepared you are. At Listerhill Credit Union, we created this step-by-step guide to help you confidently navigate the car loan process.
Read on to learn how to apply for a loan, get the best possible rate, and drive away happy.
Table of Contents
Click the section below to navigate through our comprehensive guide to getting an auto loan:
Car Loan Application Steps
Banks, credit unions, and dealers will examine several key factors before approving (or denying) your application. While some factors take time to improve, knowing what lenders want helps you prepare better:
Step 1: Check Your Credit Score
Credit information is the first thing your lender will consider. Your credit score is an overall rating of your reliability in meeting your financial obligations. A higher score increases your chances of approval and access to better financing options. Alternatively, negative items like missed payments and defaulted loans will harm your chances of approval.
The first item on your to-do list is to get your free annual credit report. If you find that you have many negative marks or inaccurate info, consider taking time to address these issues. It may take a bit longer to get a car, but you could potentially get a much better rate and deal.
Here are a few tips to help you improve your credit score:
Pay all bills on time: Set up automatic payments for your monthly bills. Even one late payment can hurt your score, but a solid history of on-time payments will boost it.
Lower your credit utilization: Try to use less than 30% of your available credit card limits. For example, if you have a $10,000 limit, keep your balance under $3,000.
Keep old accounts open: The length of your credit history matters. Don't close old credit cards, even if you rarely use them. A longer credit history helps your score.
Limit new credit applications: Each time you apply for new credit, it creates a "hard inquiry" on your report. Too many inquiries in a short time can lower your score.
Fix credit report errors: Get free copies of your credit reports and check for mistakes. If you find errors, dispute them with the credit bureaus right away.
Here’s the average rate that you can expect to get with your credit score:
Credit Score Level | Score Range | New Car APR | Used Car APR |
Super Prime | 781-850 | 5.24% | 7.15% |
Prime | 661-780 | 6.89% | 9.34% |
Nonprime | 601-660 | 9.82% | 13.95% |
Subprime | 501-600 | 13.16% | 18.84% |
Deep Subprime | 300-500 | 15.79% | 21.53% |
If you start working on repairing your credit score now, it will help you plan for large future purchases. This may eventually lead to you receiving lower rates and more favorable payment options.
Step 2: Review Your Monthly Income
The next factor is how much you make every month. Lenders will require you to present them with a car loan proof of income. Obviously, the amount you bring home monthly will determine the kind of vehicle you can afford. The more you earn per month, the more likely you will be able to make larger payments.
If you have a lower income, you won’t be able to borrow as much. You may be able to get a longer term, but that will wind up costing you more over time. This is something to consider when you are planning your long-term budget.
Step 3: Calculate Your Debt-to-Income Ratio
Lenders look at how much money you make compared to how much you owe each month. This is called your debt-to-income ratio. A lower ratio means you have more money available for a car payment. Most lenders want to see a ratio below 43%.
Here's how to calculate your debt-to-income ratio:
Add up all your monthly debt payments (like rent, credit cards, and student loan amounts).
Divide that total by your monthly gross income (income before taxes).
Multiply the result by 100 to get your percentage.
For example, if you earn $5,000/mo and pay $2,000 in bills, your calculation would be ($2,000 ÷ $5,000) × 100 = 40% debt-to-income ratio.
Step 4: Find the Right Financial Institution
Once you feel confident about your credit score, financial situation, and debt ratio, it's time to shop for the right financial institution.
Almost all banks and credit unions will offer a variety of car loans to customers or members. Take the time to schedule meetings with different organizations you trust and ask them how they could help you.
Remember that you will be making a regular monthly payment to this institution. Ensure you get a lower rate and a term you are comfortable with. Additionally, verify that they provide convenient repayment options and responsive support for any future questions.
Here are four popular ways to finance a car:
Traditional Banks
Many individuals have established relationships with traditional banks, making them a natural choice for loan applications. Banks now offer streamlined online applications instead of requiring in-person visits. They can process loan approvals quickly and generally have simple processes to make it easy.
You may also qualify for low and competitive interest rates depending on your credit. However, credit unions often outperform traditional banks for members with strong credit histories. Be sure to shop around before making a final lending decision.
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Online Lenders
Online auto loans have gained popularity over the past few years due to their convenience. Many lenders now offer an alternative to traditional banks or credit unions for obtaining financing.
It’s best to ensure their legitimacy and reputation before you work with them. Their strictly online presence makes it easier for them to engage in dishonest practices and policies. So, review their Better Business Bureau profile and do your research before selecting one.
They may be able to work with you more flexibly than a bank if you have lower credit. However, lenders with less stringent credit requirements may offset this flexibility by charging very high interest rates of 20% or higher. If it's your only option, having it is better than nothing. However, be cautious about accepting high interest rates for an auto loan.
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Credit Unions
Credit unions often offer much lower rates than big banks. This is because they are nonprofit organizations and can afford to focus on helping members rather than making profits. This commitment to service also means they can be more flexible with lending requirements. They may approve applications that traditional banks might deny.
This personalized approach is rooted in their strong relationships with their members. Credit unions take the time to understand your unique situation and work to find solutions that fit your needs. Learn more about getting your next auto loan with Listerhill Credit Union here.
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Joining Listerhill Credit Union is an easy process that unlocks a world of convenience! With access to over 30,000 surcharge-free ATMs and 5,000+ shared branches through CO-OP Financial Services, you'll have more direct access to your money than most traditional bank customers.
Additionally, Listerhill offers modern banking features like 24/7 Smart ATMs, Online Banking, and Mobile Banking with Mobile Check Deposit for effortless money management.
Dealerships
Another option is to secure financing through a car dealership. Many prefer this method because it allows them to 'shop around' for the best rate with just one credit inquiry. Dealerships work with several lenders and will send your application out to find the best financing option. This way, you can compare rates without getting hit with multiple credit checks.
Another benefit to getting a car loan through a dealership is that they offer various promotions. These can include no down payment and 0% financing fees for those with an excellent credit history. You can even receive financing through Listerhill at our participating dealerships.
Remember that dealers tend to have higher interest rates than you'd get straight from a bank or credit union. Like an online lender, if you have low credit, they charge much more than the average rate to finance a loan. If this applies to you, you may have more luck going straight to a credit union to borrow beforehand.
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Step 5: Get Pre-Approved for a Car Loan
Getting an auto loan pre-approval is a smart move before you start shopping around. It shows you exactly how much car you can afford and gives you greater negotiating power. Dealers will also take you more seriously if you already have financing lined up. Knowing your exact budget gives you more confidence and prevents you from considering cars outside your price range.
Step 6: Documentation to Secure an Auto Loan
Verifying your creditworthiness requires sharing specific personal and financial details. All lenders will require it whether you choose a dealership or direct auto financing. You might wonder, “What documents do I need to finance a car?”
The lender may ask you for the following information:
Your social security number and date of birth
Proof of identity, such as a passport or driver’s license
Proof of income for car loan (e.g., pay stubs or tax returns)
Proof of residence (e.g., utility bills)
Proof of insurance
When you schedule your initial appointment with a dealer or a financial institution, ask them what they recommend bringing. Make sure to keep this information secure, as it contains your personal details. Submit your information to several lenders to compare rates and terms. Try to do this within a 14-day window so multiple credit checks count as one inquiry.
Step 7: Other Important Considerations
Before signing any loan papers, review these key factors affecting your car purchase and monthly payments.
Loan Term Length—A longer loan term means lower monthly payments but more interest paid over time. Most car loans range from 36 to 72 months. Choose the shortest term you can afford to save money on interest.
Fixed vs. Variable Rates—Fixed rates stay the same for your entire loan, making budgeting easier. Variable rates might start lower but can change over time based on market conditions. Most car buyers choose fixed rates for more predictable payments.
Down Payment Requirements—A larger down payment reduces your monthly payments and total interest costs. Most lenders ask for 10-20% down on a car purchase. You might get better loan terms if you can put more money down upfront.
Early Repayment Penalties—Some lenders charge fees if you pay off your loan early. Read your loan agreement carefully to check for these charges. Ask about prepayment penalties before choosing a lender to avoid surprise fees later.
Car Insurance Requirements—Lenders require full coverage insurance on financed vehicles to protect their investment. Your insurance must list the lender as a lienholder. Budget for higher insurance costs when planning your car purchase.
Trade-In Options—Trading in your current car can reduce the amount you need to borrow. Get quotes from several dealers to determine your car's value. Remember that you can often get more money by selling your car privately.
Co-Signer Considerations—A co-signer with good credit can significantly enhance your loan prospects. By having someone with a strong financial history backing you, you may qualify for approval or even secure more favorable interest rates. However, it's crucial to acknowledge the shared responsibility involved:
If you miss a repayment (aka “default”), the obligation falls on both parties.
Ensure mutual understanding of this commitment before proceeding. It impacts not just your finances but also those of your supporter.
Take the Next Step and Apply Online for a Loan Today!
Applying for an auto loan may seem overwhelming, but we promise it's easier than you think. This is why we recommend performing your research and due diligence before you begin planning to buy a car.
At Listerhill Credit Union, we offer our members many of the perks you'd expect from a credit union and some you might not. When you apply for a car loan online with us, you get competitive interest rates, no application fees, flexible payback terms of up to 75 months, and $0 down payment options.
Click below to learn more about financing your next vehicle with us!
