9 Tips on How to Shop for Auto Loans

Q: Does auto loan shopping hurt your credit score?

No, auto loan shopping does not hurt your credit score as long as you’re undergoing a soft credit check to compare rates. Getting prequalified for an auto loan typically involves a soft credit check that doesn’t affect your credit score. Selecting a prequalified loan offer and moving forward with an application, however, may trigger a hard inquiry that may cause your credit score to drop by a few points. Lenders may conduct a hard inquiry into your credit report whenever you apply for auto loan financing. Submitting multiple auto loan applications within a 14-day time span, however, may count as a single hard inquiry.

Q: What credit score should you have when car loan shopping?

Car loan shopping is something that anyone can do regardless of credit score. Auto loan shopping may help you find the right financing terms for you, and consumers with any credit score may qualify for auto loan financing. Deep subprime consumers with credit scores ranging from 300 to 500, for example, may qualify for car loans. Deep subprime borrowers had an average loan rate of 12.84% on new car loans in the second quarter of 2022, according to Experian. Lenders can establish their own rates and underwriting standards when offering auto loans.

Q: Is it better to get auto loans from dealerships or banks?

You may shop around to determine whether it’s better for you to get a car loan from a dealership or bank. Dealerships and banks may offer auto loan financing, and you can compare their terms and conditions to determine which one is better for you.

Rebecca LakeUpdated October 4, 2022

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Auto loan financing can make purchasing a new or used vehicle affordable. But to find the best financing options, it’s important to know how to shop for a car loan.Car loan shopping requires some preparation and an investment of time. But fortunately, it’s relatively easy to shop for car loans and even apply for auto loan financing online.Here are nine tips that can make finding a loan to buy your car easier:

1. Set Your Budget First

Before you get started shopping for auto loans, it’s important to know how much you can afford to pay for a vehicle. There are several things to factor into the equation, including:

Your target purchase price
How much you plan to offer as a down payment
Additional costs that may be due at signing, such as taxes, title fees, and dealer fees
Ongoing car insurance costs
Annual vehicle registration fees
Ongoing maintenance and repairs

If you have a vehicle you plan to trade in, you’ll also want to consider how that might affect the amount you’ll finance. The more trade-in value you can get for your current vehicle and the larger your down payment, the less you may have to finance. Getting a used car is another tip for saving money on a car.If you drive a premium vehicle, luxury car maintenance costs can be particularly high. The average 10-year maintenance cost for a luxury car is about $12,000, according to an analysis of data on CarEdge.com, an automotive research and vehicle listings marketplace.

2. Check Your Credit Score

If you apply for vehicle financing, potential lenders will check your credit report and scores as part of the approval process. Your credit scores can also influence the interest rate and annual percentage rate (APR) you’ll pay on an auto loan.That’s why, before you start shopping for a car loan, it’s important to understand how you might look to a potential lender based on your credit history. Reviewing your credit reports and credit scores can provide you with some perspective on what kind of loan terms you’re likely to qualify for.You can get a free copy of your credit reports from each of the three credit bureaus (Equifax, Experian, and TransUnion) through AnnualCreditReport.com. As you review your credit reports, look for the following:

Positive items that might help your credit score, such as a solid payment history
Negative items that might hurt your credit score, such as payment delinquencies
Errors or inaccuracies

If you spot any error or inaccuracy on your credit reports, you can dispute that information with the credit bureau that’s providing it. All three major credit bureaus allow you to file disputes online. Federal law requires them to investigate disputes and correct errors if they exist.

3. Do You Need a Cosigner?

If your credit history is insufficient or you have a poor credit score because of past financial mistakes, getting a car loan could prove more difficult. In those scenarios, you might consider asking a cosigner to help you get approved for a loan.A cosigner can be a parent, a sibling, a friend, or another creditworthy person who agrees to apply for auto financing with you. If you’re approved, you and your cosigner are treated equally in terms of responsibility for repaying the loan.Asking someone to cosign has both pros and cons. On the pro side, a cosigner with an excellent credit score could help you get approved for vehicle financing at the best interest rates. The con, however, is that if you fail to repay the loan, you could ruin your credit and your cosigner’s, as well as your relationship. So it’s important to discuss the benefits and potential downsides with your prospective cosigner for a car before asking for a commitment.If you’re drowning in car loan debt, you may wonder, “Can someone take over my car loan?” Transferring an auto loan can be a complex process, but it may be an option for you.

4. Look at Multiple Lenders

Once you’ve checked your credit and have an idea of what loan terms you’re likely to qualify for, the next step is to compare loans from different lenders.

Where to Look for a Car Loan

You have several options for where to shop for auto loan financing:

Brick-and-mortar banks or credit unions
Online banks and credit unions
Online lenders that provide auto financing
Dealership financing

Your current bank may be the first place you shop for car loans. If you’ve been a good customer for years or you have multiple accounts, your bank might be willing to offer an interest rate discount or other special incentives for getting a car loan.But don’t limit your search for a car loan to just your bank. Take some time to compare interest rates and loan terms from online banks and credit unions, as well as online lenders that offer vehicle loans. If you’re buying a vehicle from a dealer, you can also ask about the dealer’s in-house financing terms.

What to Look at When You’re Comparing Car Loans

As you shop for a car loan, take note of the differences in what’s offered by different financing options. Specifically, pay attention to:

Interest rates
Annual percentage rates (APRs)
Loan repayment terms
Loan fees, including origination fees and/or prepayment penalties
Costs due at closing

It may be helpful to check the reputation of any lender you’re considering as you shop for car loans. Reading online reviews, checking the Consumer Financial Protection Bureau’s Complaint Database and looking at Better Business Bureau ratings can give you an idea of how trustworthy and consumer-friendly an auto lender may be.Consumers may ask, “What happens to a car loan in case of death?” The answer is that car loans do not simply disappear when a borrower dies. A surviving spouse may be responsible for paying the debt, or a lender may move to repossess the vehicle.

5. Consider Getting Preapproved or Prequalified

Getting prequalified or preapproved for a car loan could be helpful when you’re narrowing down your financing options. Loan prequalification means that a potential lender has taken a look at your finances and is willing to lend you up to a certain amount of money. Loan preapproval usually involves the added step of a hard credit check.If you’re interested in prequalification or preapproval, be prepared to share some basic information with your potential lender, including:

Your income
Your Social Security number (if a credit check is required)
Details about the vehicle you want to buy, including purchase price, age, and the make and model
Proof of auto insurance or the ability to be insured

You may also be asked about what kind of loan terms you prefer and how much money you plan to put down.Having a prequalification or preapproval in hand when you’re car loan shopping can give you a better idea of how much you can afford to spend and how much financing you’re likely eligible for. Bringing a prequalification or preapproval letter to a dealer can also show that you’re serious about buying, which may make the dealer more willing to negotiate the purchase terms.

6. Read the Fine Print

As you shop for a car loan and choose your financing option, don’t neglect reading the fine print. It’s important to know exactly what your obligations are as a borrower and what your total borrowing costs add up to.When reviewing your auto loan documentation, be on the lookout for things like hidden fees or add-ons that you didn’t request. If you spot anything in the loan contract that you don’t understand, don’t hesitate to ask the lender or financing company to explain it.Also make sure you review the loan amortization schedule so you understand how much your loan will cost and how your payments will be applied over time. Your lender should provide this amortization schedule, which shows you how long it will take to pay off the loan and how much of each payment will be applied to interest, to fees, and to the principal balance.

7. Consider Overall Cost as Well as Monthly Payments

When you’re shopping for car financing terms, the best way to get an auto loan may require that you consider various cost factors. You may review the total financing cost and the monthly payment of any loan offer. APR can impact the total repayment cost of a car loan, and term length can impact your monthly payment.Some lenders may offer 144-month auto loans, particularly when financing exotic cars that cost more than $100,000. A longer loan term may give you a lower monthly payment but more interest charges over the life of the loan.One of the keys on how to shop for auto loan financing is to consider the finance charges. Consumers with good credit may qualify for auto loans with an APR of 0%. In general, good auto loan interest rates fall under 5%.The average interest rate on new car loans in the second quarter of 2022 stood at 4.33%, according to Experian data. To shop auto loans as a consumer, you may compare rates across different lenders. The below table highlights the average total cost of new car loans vs. the average monthly payment in the second quarter of 2022:

Average loan term	Average amount financed	Average new car loan rate	Average monthly payment on new car loan
69.46 months	$40,290	4.33%	$667

8. How Much of a Down Payment Do You Want?

Making a down payment on a car can reduce the amount of money you need to borrow when financing a car purchase. Making a larger down payment on a car may prevent you from getting an upside down car loan in which your auto debt is greater than the value of your car.A larger down payment can minimize your borrowing costs and monthly payment. A higher down payment can also bolster your equity stake in the car.You may not need to worry about how to get out from under a car loan that’s underwater if you make a sizable down payment. A lender calculating car loan APR may offer you a lower interest rate based upon the size of your down payment.One of the down sides to making a larger down payment is it may deplete your savings. Having a sufficient amount of savings can serve as a cushion in the event of an emergency. If you’re looking for loan terms that are right for you and the best way to get an auto loan, you may want to consider how much of a down payment you can afford.Recommended: Fixed vs. Variable Rate Car Loans

9. New vs Used Cars

When auto loan shopping, you may shop auto loans for new car financing or used car financing. One key on how to shop for auto loan financing is to determine whether you’d prefer a new car or a used car.The average interest rate on a new car loan is usually higher than the average interest rate on a used car loan. A new car loan in the second quarter of 2022 had an interest rate of 4.33% compared with a rate of 8.62% for used car financing, data show.The way how car loans work is that lenders provide financing to help borrowers purchase a new or used vehicle. Borrowers are expected to repay the car loan over a set term, and these loans may include interest charges.Lenders may impose late fees if you fail to make a timely payment on your loan. But lenders may also honor a car payment grace period before such penalties would apply. The average monthly payment on a used car loan is usually lower than the average monthly payment on a new car loan. New car loans in Q2 2022 had an average monthly payment of $667 vs. $515 for used car loans, according to Experian.

Financing vs Paying Cash vs Leasing

Reviewing tips on how to shop for auto loan financing does not mean you cannot consider leasing a vehicle or buying a car outright with cash.Leasing vs. buying is a form of financing that allows you to operate a car in exchange for paying a monthly rent charge. Car leases typically include lower monthly payments than auto loan financing, but you can still compare lease rates to identify the leasing offer that’s right for you.The below table compares auto loan financing vs. paying all-cash for a car vs. leasing:

Auto loan financing	Paying all-cash	Auto leasing
Borrowers can operate the vehicle without mileage restrictions	You have 100% equity in the car, which gives you all of the rights and privileges of full ownership	Leasing companies may impose mileage restrictions limiting how much you can drive the vehicle
Borrowers are responsible for repaying the loan over a set term	You’ve bought the car outright without indebting yourself to a lender or leasing company	Lessees are responsible for paying a monthly rent charge
Borrowers own the vehicle but must repay the debt in full to remove lienholder from the title	You own the vehicle and have no lienholders listed on your title from day one	Lessees have no ownership rights and must return the vehicle when the lease ends unless they’re allowed to buy it

Car Loan Refinancing

Lantern by SoFi can help you compare auto refinance rates. Refinancing can replace your existing loan agreement with new terms that may lower your interest rate. Auto refinance loans may also give borrowers a lower monthly payment.Prequalifying and comparing auto loan refinance rates does not impact your credit score.

Frequently Asked Questions

Does auto loan shopping hurt your credit score?

What credit score should you have when car loan shopping?

Is it better to get auto loans from dealerships or banks?

Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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About the Author

Rebecca Lake

Rebecca Lake is a freelance writer specializing in personal finance, investing and small business. Her work has appeared online at U.S. News and World Report, Forbes Advisor, CreditCards.com and Investopedia. Rebecca writes about a variety of topics for SoFi, including budgeting, saving money and student loans.

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