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How to Shop for a Car Loan

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Rebecca Lake

Rebecca Lake

Updated February 12, 2021
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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 some tips that can make finding a loan to buy your car easier. 

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. 

Check Your Credit Before Car Loan Shopping

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, such as a solid payment history, that are helping your score
  • Negative items, such as payment delinquencies or maxed-out credit cards, that might be hurting your score
  • 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. 

Consider Whether You'll 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 before asking for a commitment. 

Shop for Car Loans From Multiple Sources

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
Doing the math with an auto loan calculator can give you an idea of how much individual loans might cost you. It's also 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. 

Consider Getting Prequalified or Preapproved

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, 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. 

Read the Fine Print Before Committing to an Auto Loan

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. 

The Takeaway

Shopping around for the right car loan can take time. But it's worth it to find the best option for your needs and budget. It's also important if you want to get the best interest rates and loan terms available, based on your credit history. When shopping for a car loan, you may want to consider whether a personal loan could be an appropriate choice for financing your vehicle. If you have a good credit score, it's possible that you could qualify for an unsecured personal loan with a low fixed or variable APR. Whatever you choose, be sure to make your payments promptly in order to boost your credit rating and improve your chances of getting good loan rates on your next car.
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.The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.SOLC21021

About the Author

Rebecca Lake

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.