How to Get Approved for a Car Loan

Buying a new or used car can be an expensive investment, especially in recent years. In May 2023, the average purchase price of a new, non-luxury vehicle in the United States was $44,960 according to Kelley Blue Book. Meanwhile, Edmunds reports that the average used car price in Q1 2023 was $28,381.^{[1] [2]}

Due to the high prices associated with purchasing a vehicle, paying for a new or used car out of pocket often isn’t a realistic option. Instead, many people need to seek financing. The Consumer Financial Protection Bureau (CFPB) reported in late 2022 that more than 100 million Americans relied on car loans to cover the cost of their vehicle purchases.^[3]

If your goal is to finance a new or used vehicle in the near future, it’s important to understand how to get approved for a car loan. As you learn what auto lenders consider when they review loan applications, you may be able to put yourself in a better position not only to qualify for the loan you need, but hopefully to become eligible for more attractive financing options.

Check your credit

The first step you should take to prepare for a new auto loan (or any type of financing) is to review your credit information. A lender will likely check your credit report (aka credit history) and credit score from at least one of the major credit bureaus—Equifax, TransUnion, or Experian—when you apply for a car loan. And because you don’t know which credit report and associated credit score a lender may analyze when you apply for a car loan, it’s not a bad idea to check all three.

You can access your three credit reports for free once every 12 months thanks to the Fair Credit Reporting Act (FCRA). Through the end of 2023, the credit bureaus are giving consumers free weekly access to their credit reports through the same website on a voluntary basis. If you discover errors on your credit reports, you can try to fix them before you apply for financing.^[4]

The FCRA doesn’t give you free annual access to your credit score in the same way you enjoy free credit score access. However, there are still several ways to check your credit score without paying for it.

It’s worth noting that the credit score you check online may be different from the credit score a lender reviews for a car loan. (There are many different types of credit scores.) Nonetheless, checking your credit score before you apply for financing can still be a good idea since it can give you an idea of your overall credit health and whether you need to work to build your credit or improve your credit score to buy a car.

Consider a trade-in or down payment

Depending on your debt-to-income (DTI) ratio and other factors, you might be able to qualify for a car loan without a down payment or a trade-in. But since these options have the potential to reduce the amount you need to borrow from a lender and lower your monthly payment, they’re worth considering.

Trade-in

When you trade in a vehicle, you’re selling your car to a dealership. A dealer will often bundle a trade-in together with the purchase of a new or used vehicle. However, you can also trade-in a vehicle on its own (in which case the transaction would be a stand alone sale).

You can trade in a car that you own outright or perhaps even trade in a car with a loan. But it’s best for your original vehicle to have positive equity if you want to trade in a car with an outstanding loan balance. Otherwise, you could wind up underwater in your new loan—owing more money than your new vehicle is worth.

Trading in a vehicle you own or trading a car with positive equity, however, could lower the purchase price of a new vehicle. Imagine you want to buy a used vehicle for $20,000. If you trade in a car that’s worth $5,000 (with no outstanding loan balance), you would only need to finance $15,000 to complete the purchase.

Down payment

Another possible way to reduce the amount of money you borrow from an auto lender is to provide a cash down payment. A sizable cash down payment on a car loan might enhance your approval odds for an auto loan and it could possibly help you qualify for a lower interest rate on your car loan as well.

According to Experian, a 20% down payment on a new auto loan is a good goal to help shield you from potential vehicle depreciation problems. (Vehicle depreciation issues can occur when you owe more on your car loan than your vehicle is worth.) For used car purchases, the credit bureau says a 10% down payment might be enough to help you avoid negative equity during the early stages of your vehicle loan.^[5]

Make sure you can afford the payments

When you apply for a new auto loan, a lender will want to confirm that you have the financial capacity to repay the money you’re asking to borrow. So, before you start filling out new loan applications, it’s important to ask yourself some honest questions to make sure you’re in a position to commit to monthly car payments.

Some of the questions you should ask yourself include:

• Do you have reliable income?
• Are you overextended with existing debt?
• Are you confident in your ability to repay a new loan?

If you’re comfortable moving forward, it may be helpful to look over your household budget to remind yourself of your current financial and credit obligations. From there, you should be able to determine the maximum monthly payment amount that would fit comfortably into your budget. Remember, if you didn’t have a car before you’ll need to add in additional vehicle costs like insurance, gas, and maintainance. (Tip: A free tool like Edmund’s Car Affordability Calculator can help you crunch the numbers.)^[6]

Keep in mind that you shouldn’t choose an auto loan based on the monthly payment size alone. It’s also important to review loan offers from several lenders and compare interest rates and the total cost of financing. (More on that below.)

Get pre-approved for a car loan

In general, you don’t want to wait until you visit an auto dealership to start thinking about how to get approved for a car loan. If you make this mistake, a salesperson could pressure you into accepting a car loan with a higher interest rate or less attractive borrowing terms than you might qualify for elsewhere. Instead, you might consider trying to get pre-approved for a car loan from a bank, credit union, or online lender before you start the car shopping process.

Getting pre-approved is the process of letting a lender review some basic information about you and check your odds of qualifying for a car loan. A lender can also check your potential interest rate and loan terms during the pre-approval process as well. If your initial application satisfies the lender’s criteria, it will issue you a conditional approval (aka a pre-approval) with an estimated loan offer—often including a loan amount and APR.

Does car loan pre-approval affect your credit?

Lenders that offer a pre-approval process will typically perform a soft credit inquiry to review one or more of your credit reports. Soft credit inquiries do not have any impact on your credit score. In fact, if a lender checks your credit report in the future, they would not even see a list of soft inquiries on your credit report. They are only visible on consumer credit reports you check yourself.^[7]

Getting pre-approved for a car loan with bad credit

Although buying a car with bad credit may be possible, it can be difficult and often expensive to secure financing. If you have bad credit (and you don’t have the time to try to rebuild your credit first), it may be helpful to look for lenders that offer a pre-approval process for borrowers with bad credit.

You can also consider providing a bigger down payment to help bring down your financing costs. And, if you have the option, a co-signer with good credit might also be helpful in this situation. Just keep in mind that you’re asking a friend or family member to take on a considerable risk when they co-sign for your car loan.

Pre-qualification for a car loan

People (and even some lenders) may use the terms pre-qualification and pre-approval as if they were interchangeable. However, there are some differences between the two terms that are helpful to understand.

Pre-qualification refers to the initial credit review process that a lender completes to see if a potential borrower is likely eligible for a loan, credit card, or other type of financing. If the pre-qualification process is successful, the applicant will receive a pre-approval notice at the end of it. However, it’s also possible to receive a rejection or denial at the end of an unsuccessful pre-qualification process.^[8]

When going through this process, it’s important to do your homework and make sure you fully understand how the pre-approval or pre-qualification works and that it meets your goals for the transaction.

How much can I get approved for a car loan?

If you qualify for a car loan, several factors may impact how much money a lender is comfortable loaning you. These factors may include your:

• Credit score
• Income
• Debt-to-income (DTI) ratio
• Employment history
• Down payment amount or trade-in value
• Interest rate

Keep in mind that if your debt-to-income ratio climbs too high, you may find it hard to keep up with your monthly payments. Yet some auto lenders might be willing to loan you money anyway—even in high-risk situations where your DTI ratio shows you could be overextended. For example, there are lenders that issue car loans to borrowers with DTI ratios over 50%.^[9]

As a result, it’s important for you to do your own financial assessment when you’re shopping for a new vehicle. Instead of wondering how much you can get approved for when you apply for a car loan, you’re better off taking an honest look at how much you can afford to pay.

Compare auto lenders

It’s true that taking the time to shop around for car loan offers requires extra effort. Yet the extra work has the potential to save you hundreds, perhaps even thousands of dollars on your car loan.

Locking in a car loan with a lower interest rate could lead to meaningful savings over the course of the next several years. Below is an example to help demonstrate why comparing auto lenders matters.

Auto Loan Comparison Example

The below example uses a loan amount of $28,000 for a 48-month used auto loan.

Of course, with larger loan amounts or loans with bigger differences between the interest rates offered, the potential savings could be even more significant than the examples above.

In addition to the possibility of saving money with a lower car loan interest rate, there are other factors you should pay attention to when you compare auto lenders such as:

• Origination fees
• Prepayment penalties
• Loan term
• Customer service
• Company reputation and customer reviews
• Funding speed
• Extra features (e.g., mobile app, choose your payment date, hardship options, etc.)

How long does it take to get approved for an auto loan?

Whether you apply for an auto loan or some other type of installment loan, the approval process can vary from one lender to another. With some lenders, you might be able to get approved for a loan and even receive funding the same day. In other cases, it could take several days to receive a credit decision from a lender. If approval or funding speed matters to you, you may want to look for lenders that offer faster approval and funding processes during the loan comparison process.

Bottom Line

You don’t need perfect credit to buy a car. But good credit could make it easier to qualify for an affordable car loan along with many other types of financing.

It can also be helpful to understand the basic requirements you’ll need to meet to qualify for a car loan. When you know what lenders look for when they review loan applications, you can use that knowledge to put yourself in a better position in the future.

Sources

1. Kelly Blue Book. “When Will New Car Prices Drop?” https://www.kbb.com/car-advice/when-will-car-prices-drop/
2. Edmunds. “Used Vehicle Report.” https://static.ed.edmunds-media.com/unversioned/img/car-news/analysis/2023-q1-used-vehicle-report.pdf
3. Consumerfinance.gov. “Enhancing public data on auto lending.” https://www.consumerfinance.gov/about-us/blog/enhancing-public-data-on-auto-lending/
4. Consumer.ftc.gov. “Free weekly credit reports during COVID extended through December 2023.” https://consumer.ftc.gov/consumer-alerts/2021/03/free-weekly-credit-reports-during-covid-extended-through-december-2023
5. Experian.com. “How Much of a Down Payment Should You Make on a Car?” https://www.experian.com/blogs/ask-experian/how-much-of-a-down-payment-should-you-make-on-a-car/
6. Edmunds. “How Much Car Can I Afford?” Edmunds Car Affordability Calculator.” https://www.edmunds.com/calculators/affordability.html
7. Capitalone.com. “How long do hard inquiries stay on your credit report?” https://www.capitalone.com/learn-grow/money-management/how-long-do-hard-inquiries-stay-on-credit-report/
8. Experian.com. “Prequalified vs. Preapproved: What’s the Difference?” https://www.experian.com/blogs/ask-experian/pre-approved-vs-pre-qualified-whats-the-difference/
9. Lanterncredit.com. “Debt-To-Income Ratio for a Car Loan: How It Works.” https://lanterncredit.com/auto-loans/debt-to-income-ratio-for-car-loan

About the author

Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. She is the founder of CreditWriter.com, an online credit education resource and community that helps busy moms learn how to build good credit and a strong financial plan that they can leverage to their advantage. Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many other outlets. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).

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