How to Secure an Auto Loan 101

Before you go to the dealership to purchase your car, it is important to shop around for the best lenders and get a preapproved loan. This will help you get the best interest rate on a car loan.

Two factors that determine your eligibility to borrow money and interest rates are your income and credit score. 

It is recommended that you apply for an auto loan only after you’ve checked your credit report. You may be offered a loan at a very high-interest rate or you could even be turned down for a loan if there is any incorrect information on your report. Thus, before you apply for your loan, rectify any evidence of fraud or errors on your credit report. 

If your score is poor or subprime (usually 600 or lower), and you aren’t in desperate need of a car, it is advisable that you spend about 6 months or a year to improve your credit score before you apply for an auto loan. 

Paying down credit card balances and making payments on time can help improve your credit score and qualify for a loan at a better interest rate. 

Once you’ve checked your credit report thoroughly, explore auto lenders and loan options. These can be categorized as follows:

- Captive lenders, or dealership financing

- Large national banks, like Capital One or Bank of America

- Credit unions or local community banks

- Online lenders that only provide auto loans

Even if you want to choose dealership financing, it is recommended that you compare quotes - from large banks, online lenders, local community banks, and credit unions. Your own credit union or bank might give you a preferred rate since you’re a customer, so you can even consider that as a good financing option. Compare quotes from online auto lenders as well. 

Instead of a broker or dealer, if you want to purchase a car from a private party, ensure that each lender that you consider seriously allows this purchase. Some lenders might restrict where you can make the purchase from.