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Buying a car is probably one of the most important financial decisions in your life. Whether it is a brand new car or a used car, you will need a large sum of money. Fortunately, car loans and refinancing loan options can help you fulfill your long-awaited dream of owning a car.

Many Americans rely on auto lending companies. In fact, the statistics report of the Federal Reserve Bank of New York recorded over 200 million car loan accounts in the first quarter of 2022. Although many lending institutions can offer car loans, the amount of money you can receive is limited. It mostly depends on your credit score, income, and loan duration.

Steps to Get a Car Loan

Getting a car loan is not an easy task. As the lender provides the borrower with a lump sum of money, approving the loan takes a lot of consideration. If you want to purchase a car through a car loan, check out these steps to avail a car loan:

1. Set a Budget and Know What You Can Afford

Usually, people set their minds on buying expensive cars without considering their financial capabilities. Yes, car loans may be available, but you need to pay them with interest over a long period. Thus, before asking for an auto loan, set a target monthly payment and loan duration.

The 20/4/10 principle can be your guide. It states that you should only buy a car if you can pay at least a 20% down payment, pay the loan for four years or less, and car expenses do not exceed 10% of your gross monthly income.

2. Determine Credit Score

After setting a budget, determine your credit score. The credit score serves as the lender’s basis on the amount of loan to provide. Moreover, it also determines the corresponding interest rate of the loan. Credit history, income, and current debts/loans can affect the credit score.

Credit reports contain the data needed to compute credit scores. You can check your annual credit report through the major credit reporting agencies – Equifax, Experian, and TransUnion. Your credit report will give you an idea if you can obtain a good credit score.

Car loan companies can check different credit scores to evaluate your auto loan. So it is best to maintain a good credit standing. For your reference, credit scores can be classified as:

Poor: 300-619
Fair: 620-689
Good: 690-719
Excellent: 720-850

3. Check Multiple Auto Lenders and Choose the Best Deal

After checking your credit report and score, the next step is to get a quote from multiple car loan institutions. You can check on banks, credit unions, online lenders, or car dealerships to get a car loan. The top auto lenders listed on this page can also be your guide.

Lenders will have different offers, which depend on their credit score evaluations. Note that there are car loan institutions that have no minimum credit score requirement, which can help those who have poor credit scores. Moreover, some auto loan companies may restrict your car model choices and the dealership where you can purchase a car.

Based on the auto lenders’ offers, analyze their pros and cons and choose the one that gives the best deal for you.

4. Obtain Pre-Approval of the Car Loan and Shop

With a pre-approved auto loan, you get a more accurate estimate of the loan amount and interest rate. So, you will have a clearer idea about the price of the car you can buy. That said, you can now visit car dealerships and shop for your desired car. Also, a pre-approved car loan can give you more negotiating powers at the car dealership.

It is best to get pre-approved by two to three car loan lenders by applying to them within 14 days. The pre-approval process requires a hard credit pull, which lowers your credit score. But if two or three lenders will check your credit report within a short span of time, it will only count as one.

5. Analyze Offer and Finalize Loan

Sometimes, car dealerships challenge their customers’ pre-approved loans. They can even offer lower interest rates. So after choosing the car you want, you can also apply for the dealership’s car loan offer. Then, you can compare it with your pre-approved loans. But if you have already set your mind with your pre-approved loan outside the dealership, say that you are a cash buyer. That way, you can negotiate on the car’s price and not on its monthly payment.

The process of finalizing the car loan usually differs from lender to lender. Thus, make sure to follow your lenders’ instructions. The car dealership will probably contact the car loan company to initiate funding. Also, in signing the contract, ensure that you have reviewed and understood the terms and conditions of the auto loan.

Refinancing Car Loans

If a borrower did not get favorable car loan terms, refinancing the car loan is the ideal solution. Refinancing a car loan means taking a new loan to get better interest rates or adjust the loan duration favorable to the borrower.

If you have an outstanding car loan, it is best to refinance car loans when:

You have improved your credit score.
Interest rates on car loans have fallen significantly.
Your current car loan terms are not favorable to your finances.
You want to reduce the monthly payment by extending the loan duration.
You want to increase the monthly payment to shorten the loan duration.

Refinancing a car loan only helps if it saves money in the long run. Lower interest rates but longer loan duration does not always favor the borrower. Don’t hesitate to consult financial experts to be sure.

Steps to Refinance a Car Loan

If you have met the conditions stated above, you can follow these steps to refinance your car loan:

1. Check Credit Score

Like how you determine your credit score in getting a car loan, you can check your credit data from major credit reporting agencies – Equifax, Experian, and TransUnion. With the data, you can estimate if your score is good enough to refinance a car loan. A credit score of 690-719 (Good) or 720-850 (Excellent) can make refinancing an auto loan favorable to you.

2. Assess Car Value

Cars depreciate over time. If your car’s market value is less than your loan’s remaining balance, refinancing the car loan may not be the best option. Moreover, refinancing companies may reject your application due to the car’s depreciated value, especially if it has signs of damage.

3. Prepare Documents

If you have decided to continue with refinancing the car loan, prepare these vital documents or information:

Social security number
Driver’s license
Tax forms for the last two to three years
Car information (VIN, registration, proof of insurance, mileage)
Current car loan documents

4. Get Quotes and Choose the Best Deal

Most car loan companies also offer refinancing loans. So, check your current lender if they can provide better deals through refinancing your car loan. Also, it is important to get quotes from other refinancing institutions to compare rates and offers.

After comparing the estimates, allow two to three refinancing companies to check your credit score within 14 days to prevent a decline in your credit score significantly. Then, choose the best deal – may it be a better interest rate or adjusted loan duration.

Once you have completed the application, your new lender pays off the remaining balance from your old loan. Then, it will claim ownership of your car for the meantime until you have fully paid them.

Bottom Line

Many people rely on car loans to purchase their dream car. One can avail of auto loans from banks, credit unions, lending institutions, and car dealerships. In order to get an auto loan, the borrower usually has a good credit score. It is the lender’s basis on the amount and duration of the loan.

Furthermore, there are times when the borrower wants to get better interest rates or adjust loan duration. Fortunately, refinancing a car loan has also become a norm. It is a type of loan that can pay off your current car loan to acquire better loan terms.

Now you have learned about car loans and refinancing a car loan. Hopefully, you can maximize the lessons presented here as you avail a car loan or a refinancing service for your next car purchase.

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Est. APRStrating at 6%

Min Credit Score620

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The Bottom Line

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Frequently Asked Questions(FAQ)

What Are The Benefits Of Refinancing My Car Loan?

There are several circumstances in which refinancing your car loan can prove beneficial. One of them is when your finances improve and your credit score rises. In this case, you can qualify for a new loan with a better interest rate. Conversely, you might earn less now than you did when you first got the auto loan, so you need a longer loan term that allows you to pay less in monthly rates. Another common case when car refinancing helps is when you didn’t choose the best loan offer in the first place. By refinancing, you basically get a new loan with new terms, and you can pay less in interest.

Where Can I Currently Find The Best Car Refinancing Rates?

You can look for this information online but remember there is no standard answer. The rates you get from different lenders depend on a variety of factors. Each lender analyzes borrowers on a case-by-case basis. Your location, vehicle, credit, and the length of your loan will influence lenders’ answers.

How To Choose The Best Lender For My Car Loan Refinance?

You should shop around a bit before deciding and never settle for the first offer you come across, even if the lender says they provide the best rates. Check out different lenders’ websites and read reviews and comparisons. Contact each company for more details. The aspects you should factor in during your research include the monthly payments, interest rates, and the loan’s length.

What Are The Requirements To Qualify For Auto Refinance?

To apply for auto refinancing, you only need to take a few simple steps.

1. The pre-qualification process when you submit your application.

2. The credit application process when you choose the loan you want to access.

3. The actual loan refinancing application when you submit the necessary documentation.

The requirements you must meet depend on the lender you choose for your car loan refinancing. Generally, you will need to have a good credit score to be able to qualify. Even if your credit score is less than perfect, you can get approved if it has improved since you applied for the first loan. Accessing car loan refinancing is not impossible, even with a poor credit score, as lenders assess each case individually.

You also need to be up to date with your current car loan payments to qualify. Additionally, the lender will have certain requirements regarding your car’s mileage and age. For example, many lenders only refinance car loans for vehicles no older than ten years. You will also need to have your car’s title available.

When Can I Apply For Car Refinancing. Are There Any Associated Costs?

This also depends on the type of refinancing loan you apply for. There is no strict timeline. However, you do need to have your car title, and getting it typically takes about three months after the date you purchased the vehicle. Most car owners wait for at least a few months to apply for refinancing. This is due to how refinancing affects your credit score in the short term.

In terms of costs, refinancing a car loan can benefit you in the long run if you get a better interest rate. However, there are several aspects to factor in before moving on with your application. One of the most important ones is the prepayment penalty. Some loans come with this condition; if you want to pay them off earlier, you pay extra. If your current loan has prepayment penalties, determine whether it makes sense to pay them. Find out how much you would pay over the life of your loan with your new interest rate. Moreover, remember that the car registration and title transfer process also cost money.

How Long Does It Take To Get Approved For An Auto Loan?

The specific length of time varies from lender to lender, but in most cases, you will at least get a preliminary approval within minutes. Many people are shocked at how fast they can get their auto loans. From the time you complete your application process to the time when the money is available to pay for your new vehicle is typically less than a day.

Can I Qualify For A Car Loan With A Poor Credit Score?

There is no doubt that a low credit score is going to make it more difficult for you to qualify for a car loan. It won’t, however, make it impossible. If your credit score is low, the best way to get a loan is to find multiple lending companies that work with those with financial issues in their past, and then apply directly to them. This is one of the reasons why we list the minimum credit score for each of the lending companies we review. With this information, you can skip over those that you know you won’t get approved on and focus on the lenders that are right for you.

Is A Personal Loan Or An Auto Loan Better?

When you need a loan for a vehicle there are two main options to consider. Getting an auto loan is the standard option because it will use the vehicle as collateral, which reduces the risk and therefore the APR. The other option is to get a personal loan, which is typically unsecured. In most cases an unsecured personal loan is going to have a higher interest rate. While it isn’t a bad idea to look into both options, in the vast majority of cases, an auto loan will give you better results.

Does The APR Really Impact My Monthly Payment?

Yes! The interest rate can have a big impact on your monthly payments. It is even more noticeable when you look at how much more you will be paying over the course of the life of the loan. If you can get your interest rate down by even 1%, you will save a noticeable amount.

What If I Don’t Get Approved For An Auto Loan?

It is not uncommon for someone to get turned down for an auto loan, but that doesn’t mean you should lose hope of getting a vehicle you want. If you have been turned down, there are number of things you can do. First, make sure you are applying to companies that work with people who have low credit. These companies are much easier to get a loan from. Next, go through your application and make sure there were no errors that may have resulted in the denial. Finally, if all else fails, take some time to work on boosting your credit score. There are many simple steps you can take to bump your score up by multiple steps, which could be enough to get approved!