There are two ways to buy a new or used vehicle. You can either pay for the car upfront or pay for it over time by taking out an auto loan. Many people don’t have enough cash to cover the entire cost of a new or used vehicle upfront, so they choose the latter option.
If you’ve never financed a vehicle before, you may not even know where to begin. What information will you need to apply for an auto loan? When should you apply? Follow these steps:
Set Your Budget
Some people wait to find out how much they are approved to borrow before setting their budget. However, it’s important to remember that the amount you are approved to borrow is not the same as the amount you can afford to pay for a car. You don’t need to wait for a pre-approval letter to determine your budget–in fact, you should set your budget now before you even apply for a loan.
The best way to set your budget is to think about how much you can afford to pay on a monthly basis. Start by calculating your current monthly income and monthly expenses. Subtract your expenses from your income to determine how much you can afford to spend on a car. The amount you are left with won’t just go toward your monthly loan payment. It will also need to cover the other costs associated with owning a vehicle, including gas, taxes, insurance, and maintenance.
Keep this number in mind once you move forward with your car loan application so you don’t agree to a loan with monthly payments you can’t afford.
Check Your Credit
Not only will your credit score impact your eligibility for an auto loan, but it will also affect the terms of your loan, including your interest rate. The higher your credit score, the less you may need to pay in interest over the course of your loan.
For this reason, it’s important to review your credit report before applying for an auto loan. Every major credit reporting bureau will provide you with one free credit report per year. You can also use apps such as Credit Karma to check your records for free.
Once you have access to your credit report, look for incorrect information or errors. If you spot an issue, contact the credit reporting bureau right away. Removing incorrect information or errors from your credit report could increase your credit score, which may help you secure more favorable loan terms.
If your credit score is lower than you expected, you may want to consider waiting a few months to take out an auto loan. During this time, work on improving your credit by making on-time, consistent payments on your debts. You should also avoid opening new lines of credit or making large purchases with your credit cards. Taking these two steps could help you qualify for a better interest rate once you’re ready to apply for a car loan.
Choose A Lender
You’re almost ready to start the process of applying for a car loan. But first, you need to choose a lender.
There are several different categories of auto loan lenders, including dealerships, banks, credit unions, and online lenders. Taking out an auto loan at a dealership might seem convenient, but that doesn’t necessarily mean it’s the best option. Auto dealers typically offer loans at higher interest rates than other lenders, so although you may save time by choosing this option, you may end up paying more over the course of the loan.
Here’s what to consider when searching for the right lender:
- Types of loans: Some lenders offer a wider variety of loans than others, so choose one that offers the type of loan you need. For example, if you are purchasing a used vehicle, make sure you don’t choose a lender that only finances new cars.
- Dealer options: The lender you choose could affect which dealerships you are allowed to purchase a vehicle from. Some lenders, for instance, only work with dealerships that are directly affiliated with auto manufacturers.
- Competitive interest rates: Look for a lender that offers competitive interest rates. A difference of even one percentage point could save you hundreds or thousands of dollars over the course of the loan.
This is an important step in the process of getting a car loan, so take your time to ensure you fight the right lender for you.
Now that you’ve found a reliable lender, it’s time to get pre-qualified for an auto loan. During the pre-qualification process, your lender will do a basic review of your credit history to get a general idea of your creditworthiness. Your lender will check your credit by conducting a soft inquiry, which will not impact your credit score. Based on this information, your lender will decide how much you are pre-qualified to borrow.
The steps you will need to take to get pre-qualified will vary from lender-to-lender. But generally, lenders ask for basic information about your employment, income, and expenses during the pre-qualification process.
Pre-qualifying for a loan is not the same as getting approved for a loan. Getting pre-qualified is a more informal process, so you may not be required to submit any documentation until you are ready to finalize your loan later on.
It typically only takes a few minutes to find out if you are pre-qualified for an auto loan. If you qualify, you will find out how much you are approved to borrow and at what interest rate. You are under no obligation to move forward with a loan after pre-qualifying if you are not satisfied with the terms.
Consider Your Options
If you pre-qualify, the next step is deciding whether you want to include additional features to your auto loan. Most lenders give you the option of customizing your loan by adding additional protections such as a GAP Waiver or Powertrain Coverage. It’s important to learn more about these additional options before deciding whether you should include them in your loan.
If your car is stolen or totaled in an accident, your insurance company will only pay you what the vehicle is worth. If you owe more on your vehicle than it is worth, this means you will not get enough from the insurance company to pay off your auto loan. A GAP, or Guaranteed Asset Protection, waiver protects you in this situation by covering the difference between what your vehicle is worth and the amount you still owe on it.
Powertrain Coverage acts as a warranty that covers the cost of repairing or replacing certain parts that keep your vehicle running smoothly. If you add this coverage to your loan, you won’t have to pay for expensive repairs or replacements if these components stop working properly.
Adding these features to your loan may increase your monthly payment, but they may also protect you financially in the future. Weigh the pros and cons of adding these features before deciding what’s right for you.
Find A Car
At this point, you have already pre-qualified and selected which features, if any, you want to include in your loan. Now, it’s time to shop for a vehicle. Follow these tips to ensure car shopping goes as smoothly as possible:
- Check the fine print for exclusions. Some loans exclude certain manufacturers, dealerships, or types of vehicles. For example, a loan may not cover the purchase of a new or used electric vehicle. Make sure you know about these exclusions before you start shopping.
- Stick to your budget. You should only look at vehicles that are within your budget. This will help you avoid the heartache of falling in love with a vehicle you cannot afford.
- Be aware of time restrictions. Your pre-qualification letter may only be valid for a certain period of time. If you don’t find a car within this timeframe, you may need to go through the process of getting pre-qualified all over again. To avoid this problem, make an effort to find a car before time runs out.
Above all else, enjoy the experience of finding a car that you truly love.
Finalize Your Loan
The final step is finalizing your car loan once you’ve chosen a vehicle. Just like pre-qualification, the process of finalizing your auto loan can vary from lender-to-lender. Most lenders will allow you to complete the process online or over the phone, but some may require you to do it in person.
This is the stage of the loan application process where you will need to provide documentation to verify your information. Every lender may require different types of documentation, but in general, you should expect to submit:
- Proof of income such as pay stubs or tax returns
- Proof of auto insurance
- Valid driver’s license
- Proof of residence such as utility bills or a mortgage or lease agreement
Talk to your lender to find out exactly what you need to submit. The sooner you submit all required documentation, the sooner your lender can finalize your loan.
That’s all it takes to get approved for a car loan so you can purchase the new or used car of your dreams.