What You Need to Get a Car Loan

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Most cars aren't bought by consumers: They're purchased by banks. Very few shoppers pay cash outright for their cars. Most either borrow or lease a car from the real owner: a bank, an automaker's finance arm or a credit union. Shopping for a loan isn't as fun as shopping for the car itself, but it's not as difficult as securing a mortgage, either. We recommend that you shop around for a loan before you go to a dealership. Before you can shop for a loan, though, you'll need to determine a few things.

Determine What Car You Can Afford

It might seem difficult to make this determination before test-driving a bunch of cars, but it's best to steer clear of the sales floor until you've figured this out. Affordability isn't just about the car's price; it's about the cost of financing, insuring, fueling and maintaining it. Unfortunately, you can't start with those costs, because they vary from car to car. You have to start somewhere, though, and it's OK if you don't know exactly what car to buy. If you're like most shoppers, you have an idea of the type you want and how much car you're likely to get for the amount you've got to spend. Be sure to account for one-time charges such as taxes, title and license fees, and the destination charge when you're figuring out how much you'll need to spend, as well as factoring in ongoing costs, such as insurance and gas.

Shop for Loans Before Going to the Dealership

If you're buying a new car, the financing with the best interest rate may come from the automaker, available only through the dealer. Those can include zero-percent financing or cash rebates from so-called "captive" finance companies that work directly with the automakers. Remember that the best terms are limited to specific models, loan periods and for buyers with the best credit ratings. Dealers don't always have the best deals, though, and when they're not operating through a captive finance company, they get a commission for setting up a loan with a bank that you could go to directly. After you've negotiated the car's purchase price, the only way to know if the deal you're presented with is a good one is for you to have shopped around beforehand. You may not be able to shop rates from the captive lenders before actually buying a car, but you can shop the rates available from various banks and credit unions.

Know Your Credit Rating

To know what kind of rate you can expect, and to head off any obstacles you may encounter, you'll need your credit rating. The rating takes into account how long you've had credit, how diligently you pay bills, how much of your available credit you've used, and your mix of revolving credit — such as credit cards — and more desirable debt, like a mortgage and previous car loans.

The rating is in the form of a score between 300 and 850, with higher numbers reflecting a better credit history. The cutoff points for different credit tiers — and the corresponding loan rates — vary from lender to lender, so comparison shopping is essential to get the lowest rate.

Prepare to Open Your Books

Though the credit rating takes into account much of your credit history, a loan application will ask for more. The basics include your full name, address, date of birth and Social Security number. Expect to be asked for information about your current employer or employers, your income and how long you've held your job. The application might also ask for your monthly gross income, meaning your income before any taxes or deductions are taken out.

Even if you fill out an online "short form," it's sure to lead to a more detailed one. The bigger risk that you appear to be to lenders, the more information they're likely to request. The most detailed application will ask about your assets and expenses, including bank account numbers and if you've filed for bankruptcy within the past seven years. Whether you own or rent your home also plays a part in your eligibility. You may be asked your monthly rent or mortgage payment, and possibly for an estimate of your monthly expenses.

Thanks to the Equal Credit Opportunity Act, lenders are prohibited from discriminating based on marriage status, but you might be asked anyway, as a way of uncovering other obligations, such as alimony.

The Fine Print

An application should request authorization to obtain a credit report and to confirm any information you submit. Make sure you know whether there is an application fee ahead of time.

Preparing ahead of time doesn't just make the process faster and simpler, it ensures that you'll get the best possible loan and helps prevent complications. Surprises that can be remedied, such as an erroneous credit rating, are best found by you when you have time to correct them, not after you've committed to a more expensive loan because you didn't know any better.

Financing Your Car

Executive Editor Joe Wiesenfelder, a Cars.com launch veteran, leads the car evaluation effort. He owns a 1984 Mercedes 300D and a 2002 Mazda Miata SE.  Email Joe