What should I know before applying for an auto loan?

Buying a car is an exciting milestone, but before you apply for an auto loan, it’s important to understand the financial factors that can affect your experience. Your credit score plays a key role in determining your interest rate and loan terms, so check it ahead of time and work on improvements if needed. Set a realistic budget that includes insurance, fuel, maintenance and other ownership costs, aiming to keep your total car expenses within 15 to 20 percent of your take-home pay. Be sure to compare loan rates and terms from multiple lenders, paying close attention to the annual percentage rate (APR) and total loan cost, not just the monthly payment. Think about whether a new or used car fits your needs, get pre-approved before shopping, and make a down payment if possible to reduce your loan amount and interest. Finally, watch out for optional add-ons from dealerships that can increase your overall cost. This guide walks you through everything you should know before applying for an auto loan so you can make a confident, well-informed purchase.

Know your credit score and history

Your credit score is one of the first things lenders look at when evaluating your auto loan application. It gives them insight into how reliably you’ve repaid debts in the past. A higher score often leads to lower interest rates and more favorable loan terms, which can save you thousands over the life of the loan. Before applying, pull your credit report from one of the three major bureaus and check it for any inaccuracies. If your score is lower than you'd like, consider waiting to apply while you work on improving it through consistent payments, reducing credit card balances or avoiding new debt.

Set a realistic budget

It’s easy to fall in love with a car that’s outside your price range, which is why setting a firm budget ahead of time is essential. Start by calculating what you can comfortably spend each month on a car payment. Be sure to include all ownership costs—things like insurance, maintenance, fuel and registration fees. A good rule of thumb is to keep all auto-related expenses under 15–20% of your monthly take-home pay. Solarity’s auto loan calculator can help you estimate what a loan payment might look like based on different price points, terms and interest rates.

Compare loan rates and terms

Loan rates can vary widely between lenders, so it pays to shop around. When comparing offers, look at more than just the interest rate. Consider the annual percentage rate (APR), which includes fees and gives a fuller picture of your loan cost. Also think about the length of the loan—shorter terms typically have higher monthly payments but cost less in interest over time. Solarity offers competitive rates and flexible terms to help you find a loan that matches your budget and goals.

Decide between new and used

Choosing whether to buy a new or used car will significantly impact your loan. New vehicles usually come with lower interest rates and full warranties, which can offer peace of mind. However, they also depreciate faster, meaning you may owe more than the car is worth early in the loan. Used cars tend to have lower purchase prices and slower depreciation, but may come with slightly higher loan rates and maintenance costs. Solarity’s auto loans can be used for both new and used vehicles, giving you the flexibility to choose what works best for you.

Get pre-approved before shopping

Getting pre-approved for an auto loan is a smart way to streamline the buying process and give yourself an edge when negotiating. With pre-approval, you’ll know exactly how much you can borrow and at what rate, helping you stay within budget and avoid surprises at the dealership. It also signals to sellers that you’re a serious buyer, which could strengthen your bargaining position. Solarity offers fast, easy online applications and pre-approvals to help you shop with confidence.

Understand the total loan cost

It’s easy to focus on monthly payments when comparing auto loans, but the total cost over time matters just as much—if not more. A loan with a lower monthly payment might seem attractive, but it could cost you significantly more in interest if the term is longer. Be sure to look at the full picture: principal, interest and any additional fees. Use the auto loan calculator to model different loan scenarios and see how small changes in interest rates or terms can affect your long-term cost. Making an informed choice now can save you money down the road.

Consider your down payment

Making a down payment can reduce the amount you need to finance, which often results in lower monthly payments and less interest over the life of the loan. It can also help you qualify for better terms or even avoid the need for GAP insurance. While some lenders offer no-money-down financing, putting even a modest amount down can strengthen your loan application. Aim for 10–20% of the car’s value if you’re able, but Solarity offers options that work with your financial situation, even if you’re not putting a large amount down.

Watch out for add-ons

Once you’ve settled on a car, the dealer may present you with a variety of add-ons—extended warranties, GAP insurance, service contracts or appearance packages. While some of these can offer value, others may not be necessary or may be available elsewhere for less. Adding extras to your loan increases the total amount you finance, which can lead to higher payments and more interest. Always ask questions, read the fine print and don’t be afraid to say no if something doesn’t align with your budget or needs. Solarity offers flat-fee GAP insurance at a significantly lower cost than most dealerships, helping you save money while still protecting your investment.

Ready to apply?

Solarity Credit Union makes the auto loan process simple and transparent. Whether you're buying new or used, from a dealer or private party, we offer affordable auto loans, great rates and helpful tools. Apply online today and drive away with confidence.