Steps to follow before applying for a car loan
Buying a new car or a used vehicle is a big financial decision – and there are some important steps you need to take before applying. You can save time and money by preparing in advance.
What to do before applying for a car loan
Before visiting a dealership or diving into online purchase, there is some homework to do to get the best deal. This research will help you understand how much vehicle you can affordthe possession price and expected loan rates based on your credit history.toc
1. Set your budget
Your budget is your guide to understanding how much you can afford. Enjoy a car loan calculator experiment with loan amounts and rates to find an affordable monthly payment. But wait until you have searched for lenders to finalize the figures.
And remember, there’s more to vehicle maintenance than just the monthly loan payment. This includes factors such as gas, insurance, vehicle accessories, and any trips to the mechanic, whether planned or not. Experts recommend keeping your monthly car expenses to 20% or less of your take home pay.
Discount rate advice
Buy the full amount, not just the monthly cost. Focus on the total cost you will have to pay over the course of the loan and the incidental costs of owning a car.
2. Clean up your credit report
Your credit score and history will almost always be the primary factor in the rates lenders will offer you. These rates will influence your monthly disbursement and the overall cost of the loan.
Credit score requirements vary with each lender. Most lenders offer better rates to borrowers with scores above 670. Applicants with scores above 740 can potentially qualify for the lowest rates, including 0% APR offers offered by the manufacturer or dealer.
But having bad credit can’t stop you from finding a lender. Many lenders are gradually moving away from traditional acceptance criteria and focusing on additional factors, such as education or work history.
In any case, it is in your interest to improve your credit before applying for a loan. Get a copy of your free credit reports at AnnualCreditReport.com, highlight areas that need improvement and challenge mistakes. Also pay special attention to your debt to income ratio, which compares your monthly bills to your income. This can help you get a competitive rate.
3. Gather your documents
When you submit a loan application, be prepared to provide your personal and financial information. Information about the car you want to buy is also useful.
- Personal information, including your name, date of birth, address, driver’s license and social security number.
- Proof of address, such as a bank statement, utility bill, rental agreement, or mortgage statement
- Annual income, employer details and payslips.
- Vehicle information, such as age, make, model, finish, current mileage, and vehicle identification number.
The vehicle information is the least important. Almost all lenders offer a pre-approval process that gives you up to 30 days to purchase a vehicle. So if you want to know how much you can afford before you hit the parking lot, not having the vehicle information shouldn’t impact your approval prospects.
Take some time to explore your options. It’s essential to research loans from traditional lenders, credit unions, and online lenders, as well as dealer financing, to know you’re getting the best rates and terms.
Even if one lender’s interest rate is 1 or 2 percentage points lower than the others, you could save a lot of interest over the life of the loan.
Imagine that you take out a $36,000 loan over 4 years. If you get a loan with an interest rate of 7%, you will pay $5,379 in interest over the life of the loan. But if you manage to get a loan with a rate of 5%, the total amount of interest you will pay drops to $3,795.
When determining which lender is right for you, read the fine print and check for additional costs, such as fees or penalties. Also find out about the eligibility criteria and loan terms offered by the lender. There is no best loan for everyone, so look for a loan that meets your specific needs.
You may also be offered dealer financing. More often than not, dealerships don’t have the best rates available. Showing up with a quote from an outside lender can give you the edge in negotiating a fair rate.
5. Ask for a loan pre-approval
Applying for loan pre-approval is one of the best ways to stay in control when it comes to trading. Pre-approvals are usually valid for 30 days and give you a clear idea of the terms and rates you can expect with a specific lender.
The best part: often you don’t even have to choose a vehicle yet, only the amount and duration you want. Getting multiple quotes can help you get the best rate. But keep your purchase rate within a two-week window, because the FICO scoring model consolidates several tough asks into one during that time, minimizing damage to your credit score.
Comparing rates can be tricky and not all lenders offer pre-approval. However, the added security is a huge plus, so consider researching lenders that offer this option.
After you’ve established your budget, checked that your credit is up to par, gathered the necessary documents and researched the best car financing offer, the fun part can begin.
Look for the perfect bike, but stick to your budget and negotiate with the dealer before making the purchase. More importantly, buy your car with the same thoroughness you used to get the best deal on a new car loan.