Applying for an auto loan is easy. All you need to do is submit a loan application with the requested documentation to the lender and wait for a loan decision. But securing a loan offer with a competitive interest rate is another story.

woman in new car

You’ll need to do a little legwork and possibly get your financial ducks in a row. It may take a bit of time to get it all done, but your wallet will thank you.

Keep reading for a step-by-step guide to securing the optimal car loan for you:

Step 1: Review Your Credit Report

When lenders are evaluating your loan application, they are concerned with two primary factors: the ability to repay the loan and your credit rating.

They want to make sure you’re a good risk and actually have the means to make timely payments each month. And part of making that call is by taking a look at your credit history and score to gauge how you’ve handled other debt obligations thus far.

For this reason, you want to make sure your credit report is accurate and before the lenders take a look. Plus, your score, which is usually used by lenders to set a rate, is determined by the contents of your credit report.

Grab a free copy of your credit reports and check your credit scores.

Dispute Inaccuracies

If you spot errors on your credit report, file a dispute right away. The credit bureau has 30 days to reach out to the creditor and communicate the results to you. And if you really want to get the ball rolling a little faster, you can always reach out to the creditor directly and try to resolve the issue. More detailed guidance on how to file a dispute can be found here.

Step 2: Run the Numbers

What type of car are you planning to buy? Jot down the purchase price (be sure to add on taxes and registration) and peruse the web for average interest rates. Next, use an online auto loan calculator to determine how much the car will cost you on a monthly basis and over time.

When doing the calculations, try inputting different loan amounts, interest rates, and loan terms until you decide on a monthly amount that seems comfortable.

By doing this, you may find that the car you wanted is way out of reach and you need to look for cheaper vehicles. This may not be a good feeling, but it’ll save you the disappointment of applying for a loan and being denied because the purchase price is beyond your means.

Quick note: refrain from focusing too much on the monthly payment. Instead, pay attention to what you’ll be paying in interest and how much the loan will cost you over time.

Step 3: Analyze Your Spending Plan

Determining how much you want to spend each month is a must. But you need to take it a step further by seeing how a new auto loan would fit into your monthly budget or spending plan. To do so:

  • Add the monthly loan amount to your current list of expenses.
  • Take a look at your disposable income. Will it be drastically reduced?
  • Evaluate how your financial goals will be affected. If an auto loan means you’ll spend several more years paying down debt or you won’t be able to save much each month after living expenses are covered, you may want to consider finding a vehicle that will come with a substantially lower monthly payment.
  • Don’t forget to add in the cost of maintenance, repairs, insurance, and gasoline. It doesn’t make sense to buy a car when you can afford to actually keep it up or put gas in it. Some vehicles are far more expensive to maintain than others, come with higher insurance premiums, or burn gas like they’re going out of style.
  • Ax unnecessary expenses from your budget to free up room for the loan payment.

Step 4: Research Lenders

When searching for auto loans, you’ll quickly discover there are three primary types of lenders to choose from.

Online Lenders

There are also several online lenders that offer auto loans to consumers with all types of credit backgrounds. So, don’t overlook this option when scoping out lenders.

Credit Unions

Similar to community banks, credit unions also pride themselves on customer relationships. And since they are non-profit, member-owned entities, they don’t have a commercial ax to grind. For this reason, you may have more luck and in some cases, secure a lower interest rate.

woman standing next to car


There are major banks, like Bank of America and Wells Fargo, and there are community banks that are local operations. Both offer auto loans to consumers, both online and in-person.

But you may find that the barriers to qualification are a bit more stringent with major banks as they get scores of loan applications and use technology to screen applicants and will issue a rejection without thinking twice.

On the other hand, community banks tend to value customer relationships a bit more. So, you may be able to plead your case and get approved for a loan even if your application is initially rejected.

A Word of Caution

There are scores of shady subprime lenders that prey on consumers with tarnished credit history. And unfortunately, they often find success with this group of consumers because many feel their credit is too poor to qualify for an auto loan elsewhere.

But this is not always the case as some banks, credit unions and online lenders may be willing to approve your application. So, explore those options before settling for a loan with an exorbitant interest rate from a buy here, pay lender.

If you’re unsure of where to start, take a look at these lenders that offer auto loan financing to individuals with less than perfect credit.

Step 5: Get Pre-Approved

Now that you’ve decided on a lender, it’s time shop around for the best loan offer on the market.

Rate Shopping

The good news is you have 45 days to get approved without dinging your credit score, thanks to myFICO. Why so? As long as you choose a loan within this window, all the credit inquiries will count as a single entry on your credit report. So, this means you scope out several options before settling.

If you’re considering an online lender, check their website to see if they have a pre-qualification tool that allows you to enter your information and view loan options and interest rates you qualify for.

What You’ll Need

To obtain a pre-approval, the lender will more than likely request the following information:

  • Proof of income
  • Proof of residence
  • Proof of insurance
  • Other financial statements, like profit and loss ledgers (if self-employed) or bank statements
  • Credit references (in requested)

Failure to provide this documentation could result in the delayed processing of your application. Or the prospective lender may choose to reject it altogether.

Step 6: Find Your Ride

At last; the best part of the process! Finding the car of your dreams shouldn’t be too painful. But you want to use resources, like Kelley Blue Book, to ensure you’re getting a good deal on the vehicle.

Also, take a peek at the CARFAX Report to confirm the car has a clean track record and legitimate title. Otherwise, you may run into issues with the lenders when it’s time to close on the loan.

Buying from the dealership? Be sure to bring the loan offers you’ve received to see if they can beat the best one. The sales representative and financing department want to earn your business, so chances are they will do as much as they can to make it happen.

Bottom Line

By taking these steps, you should be able to secure the most competitive loan offer available to you without spending a fortune on interest. But if you exhaust all your options and can’t secure an auto loan that best suits your needs, return to the drawing board and work on improving your credit rating so you’ll qualify in the future.

And if you have no choice but to accept a subprime loan offer because you’re in a dire situation, commit to working on your credit score and refinance the loan once 6 to 12 months have passed and you can qualify for a better rate.