With the average new car priced just under $50,000—and used cars around $25,000*—an auto loan can make that cost more manageable by spreading payments out over time, typically with interest.
In this article, we’ll walk through what to expect and how to prepare.
Shop around for the best deals
Several types of lenders offer car loans, including banks, credit unions, and dealerships. Each one may offer different rates and terms, so it’s worth taking the time to compare options.
One of the most important factors to consider is the interest rate—the cost of borrowing money, expressed as a percentage. It can vary greatly depending on the current market and your credit score, among other factors.
Car loans may have either a fixed or variable interest rate:
Fixed interest rate: Stays the same for the life of the loan. Your monthly payment remains predictable.
Variable interest rate: Can increase or decrease over time based on market conditions. This makes budgeting more difficult.
Using an online car loan calculator—like those from Bankrate or Credit Karma—can help you estimate your monthly payments based on the interest rate, loan amount, and repayment term.
Check your credit report
Consider reviewing your credit report before applying for a car loan. It’s standard for lenders to review your credit history when deciding whether to approve your application. In general, a higher credit score helps you qualify for better interest rates and loan terms.
You can access your credit report for free on AnnualCreditReport.com, which provides weekly reports from the three main credit reference bureaus: Equifax, Experian, and TransUnion.
A credit report includes important financial information such as your current and previous credit accounts and your payment history. If your score is lower than you’d like, improving it before applying could make a car loan more accessible.
Apply for a car loan
Once you’ve found a lender offering terms that work for your budget, you can start the application process. Most lenders let you apply online, though some may ask you to apply by phone.
Regardless of how you apply, you’ll likely need to provide the following information:
Name, address, and contact details
Social Security number
Employment and income information
Desired loan amount
Lenders will also ask for details about the vehicle, such as its make, model, and price.
To verify your income and employment, you may need to submit supporting documents like pay stubs, tax returns, or bank statements.
The approval process
Your lender may offer pre-approval for a specific loan amount based on the information in your application, but that amount isn’t guaranteed. The next step is underwriting, where the lender takes a closer look at your finances and supporting documents to determine if you qualify for the loan.
During underwriting, the lender will typically:
Review your credit report
Verify your income and employment
Assess your overall financial situation
One factor lenders often consider is your debt-to-income (DTI) ratio. You can calculate your DTI by dividing your total monthly debt payments by your gross monthly income. Most of the time, a lower DTI means you’re in a better position to take on a car loan.
Wait for a decision and review your loan documents
Underwriting usually doesn’t take long. In some cases, you may get a decision within a few hours, but it can also take a couple of days depending on the lender.
If you’re approved, the lender will ask you to review and sign your loan documents. This generally includes a loan agreement outlining your interest rate, repayment schedule, and other key terms.
Once you’ve signed the paperwork, the lender can release the funds so you can move forward with your vehicle purchase.
Make repayments
You’ll probably start making monthly car loan payments shortly after receiving your funds. Each payment includes a portion of the loan principal and interest.
It’s important to stay on top of your payments. Missing one or more could negatively affect your credit score and may lead to loan default, which can make it harder to qualify for financing in the future.
If you’re having trouble making payments, contact your lender as soon as possible. Depending on their policies, you may be able to defer payments temporarily or explore other options to stay current.
Don’t forget about insurance
Most lenders require auto insurance, so it makes sense to factor it into your monthly budget and choose coverage that protects both your vehicle and your finances.
Dairyland®, a brand of the Sentry Insurance Group, offers many types of car insurance with flexible options to meet loan requirements and fit your budget.
Frequently Asked Questions (FAQs)
Do I need to make a down payment when buying a car?
A down payment isn’t always required, but it can be a smart move. Putting money down may help you qualify for better loan terms and reduce your monthly payments. A down payment of around 20% is common for new cars, though used vehicles often require less up front.
What does APR stand for?
APR stands for Annual Percentage Rate. It reflects the total yearly cost of borrowing money, including both the interest rate and any lender fees. APR helps you compare loan offers more accurately.
What is gap insurance?
Gap insurance is optional coverage that helps pay the difference between what your car is worth and what you still owe on your loan if your vehicle is totaled or stolen. It may be helpful if your loan balance is higher than your vehicle’s current value.
A new car requires new insurance. But you'll need to select the right coverage before you take the car off the dealer’s lot. We answer some common questions about buying insurance.
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