What to do before applying for a car loan

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Published on September 23, 2024 | 4 min read

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Key takeaways

Applying for preapproval can help you know how much you can afford and negotiate at the dealership.
The higher your credit score is, the lower your interest rates may be. Lenders offer competitive terms to borrowers with good to excellent credit.
Have a budget in mind and know your credit score so you can find the best lender for your finances.

If you’re looking to get a new set of wheels, you may first need to secure auto financing. Preparing before you apply could help you secure the best auto loan rate for your situation and also help you understand when to apply for a car loan.

Before deciding which car to make yours, start by determining your budget. Next, consider your credit score and prepare to shop around for the best rate. Applying for prequalification can also help you learn what rates are available to you without hurting your credit score.

What to do before you apply for a car loan

Before visiting a dealership or looking into online buying, some homework can help you get the best deal. This research will help you understand what you can afford, the price of ownership and the rates you can expect based on your credit history.

1. Set your budget

Your budget is your guide to understanding how much you can afford. Use a car loan calculator to experiment with loan amounts and rates to find an affordable monthly payment. But wait until you’ve moved on to shopping for lenders to finalize any numbers.

Keep in mind that vehicle upkeep is more than just the monthly loan payment. It includes gas, insurance, vehicle add-ons and trips to the mechanic — expected or otherwise. Experts recommend keeping your monthly car-related expenses at or below 20 percent of your take-home pay.

Learn more: Is your car payment too expensive for your monthly budget?

2. Clean up your credit report

Your credit score will almost always be the primary factor for your interest rate. Lenders tend to offer better rates to borrowers with scores above 670. Applicants with scores above 700 may be able to qualify for the lowest rates. With excellent credit, you may qualify for 0 percent APR deals offered by the manufacturer or dealership.

Some lenders offer auto loans to borrowers with poor credit. However, expect to receive a higher interest rate than someone with a stellar credit profile.

Either way, improving your credit before applying for a loan is in your best interest. Grab a copy of your free credit reports from AnnualCreditReport.com. Highlight any areas that need improvement and dispute any errors.

Also, pay special attention to your credit utilization ratio. By paying off bills and keeping your credit card use low, you may be able to quickly raise your credit score.

Bankrate tip

If your score is lacking, start your search with bad credit auto loans. They tend to have more lenient requirements. Your debt-to-income ratio may also matter, but lenders will primarily want to see that you can handle your debts.

3. Shop around

Take some time to explore your options. Shopping with multiple lender types is the key to getting the best rates and terms. Check out banks, credit unions and online lenders before applying for dealership financing.

Prequalify with multiple lenders to preview possible rates without a hard credit check. Then, calculate the total costs of your loan, including your monthly payment and total interest.

An interest rate just one or two percentage points lower could save you hundreds over the loan term and lower your monthly payment.

For example, you would save over $1,500 in interest on a $36,000 auto loan with a four-year term.

Interest rate	Monthly payment	Total interest paid
5%	$829	$3,795
7%	$862	$5,379

You should also read the fine print and check on extra costs, such as fees or penalties. Ask about the eligibility criteria and loan terms the lender offers. There is no single best loan for everyone. Search for a lender that fits your specific needs.

You may also be offered financing through the dealership. Most often, dealerships don’t have the best rates available. Walking in with a quote from an outside lender can give you the upper hand in negotiating a fair rate.

Finally, look out for a “conditional approval” clause that can result in higher rates than you initially signed for. Beware of other predatory sales tactics, too.

Bankrate tip

While useful, applying for prequalification is not an official offer and won’t put you in a strong negotiating position at the dealership. But it is a useful tool for comparing possible rates among multiple lenders.

4. Gather your documents

When you submit a loan application, be prepared to provide documents on your personal and financial information.

Personal information: Your name, date of birth, address, driver’s license and Social Security number.
Proof of address: Bank statement, utility bill, lease agreement or mortgage statement.
Proof of income: Pay stubs, bank statements or tax returns.
Vehicle information: Age, make, model, trim, current mileage and vehicle identification number (VIN).

Vehicle information is the least important. Almost all lenders offer a preapproval process that gives you up to 30 days to shop for a vehicle.

5. Apply for loan preapproval

Applying for loan preapproval is one of the best ways to put yourself in control when negotiating with a dealer. Preapprovals are usually valid for 30 to 60 days. They tell you exactly what terms and rates you can expect with a specific lender.

Multiple preapproval quotes can help you land the best rate — we recommend getting at least three. But keep your rate shopping to a two-week window. The FICO scoring model groups several hard inquiries into one during this period, minimizing the temporary drop to your credit score.

Next steps

After shopping for the best deal on vehicle financing, the fun part can begin. Look for the perfect ride, but stick to your predetermined budget and remember to negotiate with the dealer before purchasing.

Most importantly, shop for your car with the same thoroughness you used to get the best deal on a new auto loan.