What banks look at before they say yes
Banks approve car loans based on three things: your credit score, your income, and how much you can put down. Your credit score tells them whether you have paid past debts on time. Your income shows them you can afford the monthly payment. Your down payment reduces the amount they have to lend you, which lowers their risk.
Most banks want a credit score of 620 or higher, though some will go lower. If your score is below 620, you may still find lenders, but the interest rate will be higher. Banks also look at your debt-to-income ratio — how much you already owe each month compared to what you earn. If you already have large car payments, credit card bills, or student loans, a bank may turn you down even if your score is decent.
The down payment matters more than many people realize. A larger down payment means you borrow less, which makes the bank more willing to lend. A 20 percent down payment is common and usually gets you better terms than 10 percent. If you have no down payment saved, some banks will still lend to you, but the interest rate will be higher and the loan will take longer to pay off.
Key Takeaways
- Banks check your credit score, income, and how much debt you already carry before deciding whether to lend to you.
- A down payment of 20 percent or more usually gets you a lower interest rate than a smaller down payment.
- You will need recent pay stubs, tax returns, and a bank statement to prove your income and savings.
- Getting pre-approved before you shop for a car tells you exactly how much you can borrow and locks in an interest rate for a set number of days.
- The interest rate you receive depends on your credit score, the loan term, and whether the car is new or used.
How to prepare your documents before you walk in
Bring recent pay stubs — usually the last two months — to show your current income. If you are self-employed, bring your last two years of tax returns and a profit-and-loss statement from your accountant. Banks want to see that your income is stable, so if you changed jobs recently, bring an offer letter or a note from your new employer confirming your start date and salary.
You will also need a bank statement showing your down payment money. Banks want proof that the down payment is actually yours, not borrowed from someone else. Bring a statement from the last 30 to 60 days. If you have a co-signer — someone who will be responsible for the loan if you cannot pay — bring their pay stubs and tax returns too.
Bring your driver's license and Social Security number. The bank will run a credit check, which requires your Social Security number. They will also verify your identity with your license. If you have been at your current address for less than two years, bring proof of your previous address — a utility bill or lease agreement — so the bank can confirm your history.
The difference between pre-approval and final approval
Pre-approval is a conditional yes from the bank based on the documents you have shown them. It tells you the maximum amount you can borrow, the interest rate you will receive, and how long the rate is locked in — usually 30 to 60 days. Pre-approval is not a may provide, but it is strong enough to take to a car dealership and shop with confidence.
Pre-approval does not require you to pick a specific car. You can use it to shop around and compare prices. Once you find a car you want to buy, you tell the bank the vehicle identification number (VIN), the price, and the mileage. The bank then orders a vehicle inspection report to make sure the car is worth what you are paying for it.
Final approval comes after the bank inspects the car and confirms it is worth the loan amount. At this point, the bank issues the loan and sends the money to the dealership or seller. Final approval usually takes three to five business days after you provide the VIN and sale price. If the car is worth less than the sale price, the bank may lower the loan amount and ask you to put down more money.
Interest rates and how your credit score affects them
The interest rate you receive depends mainly on your credit score, the length of the loan, and whether the car is new or used. A new car usually gets a lower rate than a used car because it is less likely to break down. A shorter loan — say, 36 months instead of 72 months — usually gets a lower rate because the bank gets its money back faster.
Credit score ranges vary slightly between banks, but here is how they generally map to rates. A score of 750 or higher usually gets the lowest rate available. A score between 700 and 749 gets a rate slightly higher. A score between 650 and 699 gets a noticeably higher rate. A score below 650 gets the highest rates, and some banks will not lend at all.
The difference between a low rate and a high rate adds up quickly. On a $25,000 car loan over 60 months, a 4 percent rate costs about $2,600 in interest. A 10 percent rate costs about $6,800 in interest — more than $4,000 more. This is why improving your credit score before you apply can save you thousands of dollars over the life of the loan.
Where to get a car loan besides your bank
Your personal bank is one option, but credit unions often offer lower rates. Credit unions are member-owned, non-profit organizations, and they typically have less strict credit requirements than banks. If you belong to a credit union, check their rates before you go to a bank. You do not have to be a member to join most credit unions — you can often join by opening a savings account with a small deposit.
Online lenders and auto finance companies are another option. Online lenders like LendingClub and Upstart work entirely through their websites and can give you a decision in hours. Auto finance companies like Ally and Capital One specialize in car loans and often have flexible credit requirements. The tradeoff is that online lenders and auto finance companies sometimes charge higher rates than banks, especially if your credit is below average.
Dealership financing is a third option. The dealership arranges the loan through a bank or finance company on your behalf. This is convenient because you handle everything in one place, but dealership rates are often higher than what you would get if you shopped on your own. If you use dealership financing, get pre-approved from a bank or credit union first so you know what rate you should expect.
What happens after the bank approves your loan
Once the bank issues the loan, the money goes directly to the seller or dealership, not to you. You sign loan documents that spell out the monthly payment, the interest rate, the loan term, and what happens if you miss a payment. Read these documents carefully — they are legally binding.
The bank will hold the title to the car until you pay off the loan. This means the car is collateral for the loan. If you stop making payments, the bank can repossess the car. Once you pay off the loan in full, the bank releases the title to you, and you own the car outright.
You are required to carry collision and comprehensive insurance on the car while the loan is active. The bank will ask for proof of insurance before they release the money. If your insurance lapses, the bank may buy insurance on your behalf and add the cost to your monthly payment, which is expensive. Set up automatic payments or calendar reminders so you do not miss a payment.
What to do if the bank turns you down
If a bank denies your loan, ask why. The denial letter should explain the reason — usually a low credit score, insufficient income, or too much existing debt. If it is a credit score issue, you can work on improving your score before you apply again. Paying down credit card balances and making all payments on time will raise your score over time, though it takes months.
If it is an income issue, you may need to wait until your income increases or find a co-signer with stronger income. A co-signer is someone who agrees to pay the loan if you cannot. The co-signer does not own the car, but they are legally responsible for the debt. Make sure your co-signer understands this before you ask them.
If multiple banks turn you down, a credit union or online lender may still work with you. These lenders often have more flexible requirements than traditional banks. The tradeoff is a higher interest rate. You can also look for a less expensive car or save a larger down payment to reduce the amount you need to borrow.
Frequently Asked Questions
Do I need a down payment to get a car loan from a bank?
No, but a down payment of at least 10 to 20 percent will get you a better interest rate and lower monthly payments. If you have no down payment, some banks will still lend to you, but the loan will cost more over time.
How long does it take to get approved for a car loan?
Pre-approval usually takes one to three business days. Final approval, after you pick a specific car, takes three to five business days. Some online lenders can give you a decision the same day you apply.
Can I get a car loan with bad credit?
Yes, but the interest rate will be higher. Credit unions and online lenders are often more willing to work with lower credit scores than traditional banks. A co-signer with good credit can also help you get approved.
What is the difference between a fixed and variable interest rate?
Most car loans have a fixed rate, which means your interest rate and monthly payment stay the same for the entire loan. Variable rates change over time, which is rare for car loans. Ask your bank whether the rate is fixed or variable before you sign.
Can I pay off my car loan early without a penalty?
Most car loans allow early payoff without penalty, but check your loan documents to be sure. Paying off early saves you money on interest, though some lenders charge a small prepayment fee.