This article explains how to get a loan to buy a car. To learn about other issues when buying a car, see our article on buying and keeping a used car.

Preparing to apply for a car loan

To get a good deal on a car loan that fits your budget, you should do the following before going to the dealership:

• Figure out how much you can afford to pay in monthly car payments.  By lowering the monthly payments, you will probably be taking out a longer loan and will pay more in interest. Remember to include future costs such as insurance, maintenance, and repairs. 

• Get your credit reports and check them for errors. Banks, credit unions, and other lenders will use the information on your credit reports to determine what kind of loan to give you. You can get a free credit report from the three big credit reporting companies every twelve months. To receive your free report, go to the government-created annual credit report website. There is no reason to purchase your credit score, because the score given to a bank will be different than the score shown to you.

• Shop around for the best financing option.  Although many people finance their cars through the car dealership, you are not obligated to do so. Contact several banks or credit unions to get a prequalification letter that you can take to the dealership.

• Consider if leasing is a better alternative. When you lease a car, you are essentially paying for the depreciation of the car. The payments are lower than a loan, but you do not own the car at the end of the lease.

Common financing terms

• Annual Percentage Rate (APR) is the total cost you pay in exchange for taking the loan. This includes interest and other loan charges and fees. This is an annual percentage of the total loan amount.

• Finance Charge is the total amount of interest, costs, and fees you will pay over the life of the loan. This excludes the amount of the loan itself.

• Amount Financed is the amount you are borrowing.

• Total of Payments is the sum of all the payments that you must make which includes the principal amount plus the finance charges. 

• Truth in Lending Act is a federal law that requires, before you sign a contract, lenders give you written disclosure of important terms of the credit agreement, like the annual percentage rate, finance charge, monthly payment amount, payment due dates, amount financed, length of the credit agreement and any charges for late payments.

Typical costs and fees included in a car loan

• Interest Payments: Interest is the cost of borrowing the money. It's calculated as a percentage of the amount borrowed.
• Loan Origination Fees: Some lenders charge an origination fee to cover the costs of processing the loan. This is a one-time fee that may be a flat amount or a percentage of the loan amount.
• Documentary fee: The documentary service fee for 2024 in Illinois is capped at $358.03.
• Registration Fees: Fees associated with registering the loan, if applicable.
• Taxes: Certain taxes related to financing may also be included in the finance charge.
• Application Fees: Fees charged for processing your loan application.
• Document Preparation Fees: Charges for preparing the necessary paperwork and legal documents for the loan.
• Late Payment Fees: If you make a late payment, the lender might charge a fee, which is included in the finance charge.
• Prepayment Penalty: Some loans include a penalty for paying off the loan early. This compensates the lender for the interest they lose if you pay the loan off before the term ends.
• GAP insurance: this insurance pays pay the difference, also called the "gap", between the amount you owe on your car loan and the car's actual cash value in the event of a total loss from an accident or theft. The ACV is what an insurance company deems the car is worth at the time of the accident or theft, not what you originally paid or owe.Credit Disability Insurance: Similar to credit life insurance, this covers your loan payments if you become disabled and are unable to work.
• Credit Life Insurance: this insurance pays off your loan if you pass away before it's fully paid. While optional, it might be included in your finance charges if you choose to purchase it.
• Service packages and extended warranties: these are optional and sometimes included in the loan.

Neogitatiable car loan terms

• The cost of the car.
• The annual percentage rate (APR) and interest rate.  Getting a lower interest rate means you will pay less to borrow money.
• The length of the loan.  A shorter loan term will mean a lower total cost, but means higher monthly payments.  A longer loan can reduce your monthly payments but you will pay more interest over the period of the loan.
• Whether or not there will be a pre-payment penalty. This is an amount you have to pay if you pay off the loan earlier than expected.
• Other add-on products like extended warranties, service packages, GAP insurance, credit insurance, and car add-ons like sport packages or window tinting.

Financing from a dealer vs. financing from a lender

If you go through the dealer, they will get information from you and forward it to one or more lenders.  If the lender agrees to finance your loan, they offer the dealer a rate.  The interest rate the dealer offers you will be higher than that rate. This is because the dealer will receive a certain amount in exchange for handling the loan. You can negotiate with the dealer to get a lower interest rate. 

"Buy here, pay here" dealers

Some types of dealers finance auto loans directly.  They typically advertise “Buy Here, Pay Here.”  They do not work with an outside lender but instead directly lend you the money.  The interest rate for this type of loan can be extremely high. These loans can also have other unfair terms.  Even if you have bad credit, check to see if another lender will offer you financing directly. 

Loan co-signers

A co-signer is a person who is "on the hook" for your loan. They are just as responsible for the loan as you are.  If you make late payments, they will impact the co-signer’s credit rating just as they will impact yours.  So why have a co-signer?  If your credit history is limited, or you have a low credit score, your interest rate will be much lower if you have a co-signer with good or excellent credit.

Paying off your current car loan

You may be able to pay off your current car loan balance with funds from your loan. This depends on the difference between the value of the car and the amount you owe.  "Negative equity" is when you owe more than your current vehicle is worth.  Depending on the amount of negative equity, and your credit, lenders will sometimes include the amount needed to pay off your current vehicle in a new car loan. This could make the new loan more expensive. 

Car dealers may not discriminate against you

A lender cannot discourage or deny your application for credit or offer different prices or other terms and conditions of the loan for any of the following reasons:

• Race,
• Color,
• Religion,
• National origin,
• Sex,
• Marital status,
• Age,
• Public assistance, or
• Acting on your rights under the Consumer Credit Protection Act. 

Warning signs of possible discrimination include:

• You are treated differently in person than on the phone.
• You are discouraged from applying for credit.
• You hear the lender make negative comments about one of the protected groups listed above.
• You are refused credit even though you qualify for it.
• You are offered credit with a higher rate than the one you applied for, even though you qualify for the lower rate.
• You are denied credit, but not given a reason why or told how to find out why.

If you believe you have been discriminated against, you can file a complaint with the Consumer Financial Protection Bureau, or the Federal Trade Commission.

Can I return a car I just bought?

Not unless:

• The contract you signed allows you to return it, but this is rare, or
• it has serious manufacturing defects that cannot be repaired after several attempts, and is a "lemon, or
• there was serious fraud or misrepresentation in the sale of the car

Car sales are considered final. If you signed the sales contract, you own the car.  Voluntarily returning the car does not relieve your duty to pay your car loan.  When you voluntarily return the vehicle, or if it is repossessed, the lender will sell your car.  The difference in the price the dealer gets for your car and your outstanding car loan is still your responsibility.

I was approved for financing and drove my car home.  Later, the dealer called and said the financing was denied and I must bring the car back.  What is going on and what are my options?

Sometimes dealers agree to take a down payment and allow the buyer to take the car home before the loan is accepted by their lender.  This practice is known as a "yo-yo sale" or "spot delivery."  This practice is usually illegal, and you should speak to a consumer advocate attorney.

Before signing a contract or taking the car, you should have the dealership put in writing that the financing is finalized.  Sometimes car dealers use spot delivery to get the buyer to agree to a higher down payment or interest rate. Read the paperwork that you sign closely. If the contract states that the sale is contingent upon financing approval, the dealership may have the right to change the terms or ask for the car back if financing falls through.

For example, the dealer may let you take the car home for a few days then call and say the financing could not be approved. The dealer may say that you must either bring the car back or agree to a higher interest rate or down payment. You can and should bring the car back and walk away with their deposit and trade-in with no obligation. 

Under Illinois law, if the purchase of a vehicle is conditioned on the buyer having an acceptable credit rating, and the dealer cannot get financing for the buyer at the agreed terms, the dealer must return the down payment and trade-in.  Buyers do not have to put down a higher down payment, pay a higher interest rate, or find a co-signer.  If the dealer cannot get financing at the agreed terms, the law requires the buyer to return the car and dealer to return the down payment and trade-in. 

Do I have three days to cancel the contract?

No, dealers are not required to give car buyers a three-day right to cancel.  If the deal cannot be financed on the terms that you agreed to, you have the right to return the car and get any money you paid and trade in vehicles back, without any deduction. Some dealers may, by contract, offer a right to cancel.

Are there any protections for military personnel who get called up to active duty?

Yes, the Service Members Civil Relief Act (SCRA) gives service members a reduced interest rate of 6% on credit card and other loan debt incurred prior to active duty.  If your auto loan is over 6% and you get called to active duty, you likely are entitled to a lower interest rate.  Contact the Illinois Attorney General’s Office, the Consumer Financial Bureau or the Department of Veterans’ Affairs.