You’ll probably need a loan if you’re looking to buy a car.
Today’s post will examine how you can find and benefit from competitive auto loan rates, no matter your credit.
I | Auto Loans and How They Work
An auto loan is a secured loan you can use for buying a vehicle. The vehicle you choose stands as collateral. If you default on payments, your financer will repossess the car and sell it to recoup the outstanding funds.
Auto loans come with fixed interest rates. Monthly payments on these loans span up to 84 months or 7 years. The car is yours at the end of the term if you’ve cleared the balance you owe.
Most dealerships offer financing options to their customers. You can also secure loans from your local bank or credit union.
II | How to Get an Auto Loan
Review your finances.
Before starting the auto loan process, you need to evaluate your current financial situation. The state of your finances will determine if you can manage to pay for a loan.
Your lenders will also review this information, so you should tidy up any loose ends that affect your chances of getting a loan beforehand.
– Assess your income and debt.
Evaluate your current debt to income ratio. How much of your current monthly income do you set aside to repay any loans you owe? Include your regular expenses for bills, groceries, etc., in your evaluations.
Lenders will weigh your income against your debt and expenses when determining your ability to repay the loan. If they deem you a high-risk client, you’ll pay more fees than other applicants considered low-risk.
Reviewing your finances before applying can help you set realistic expectations heading into the process.
– What kind of car can you afford?
Your budget sets the purchase limit for the vehicle. Online loan calculators can help you crunch the numbers.
Besides the cost of the vehicle itself, consider the overall costs of owning a car. You’ll need insurance, and some cars are cheaper to insure than others. Likewise, purchasing insurance for a used car is more affordable than insuring a new one.
Taxes, registration, document fees, and other expenses will also apply.
– Check your credit score.
The health of your credit score determines much of your financial opportunities. It’s how lenders assess whether you’re a safe investment for their business. Your score also factors into the amount you qualify to borrow, the interest rate, and repayment terms.
Before applying for an auto loan, check your credit report. You may need to strengthen your score before going any further. The ‘acceptable score’ will vary across lenders. Keep credit requirements in mind when you’re shopping around.
Review your report for any errors and incorrect information. Fix whatever discrepancies you find immediately.
– Consider your down payment.
Most dealers require a down payment.
Your down payment is the upfront money you pay toward the vehicle’s purchase price. The more you can pay down, the less you’ll need to borrow.
A smaller loan equals less interest, lower upfront fees and taxes, and a shorter payment term.
Comparison shop for the best loan deal.
When looking for auto financing, shop around from multiple lenders before deciding. Each lender offers a different line of products, packaged with varying incentives and prices. Sometimes, they’ll sell identical packages for more or less than their competitors.
Review as many auto loan options as possible and ask them for quotes. You’re bound to find lenders with annual percentage rates (APRs) and repayment terms that fit your budget.
Send out your quote applications within two weeks. Financers will conduct a hard inquiry into your records for a full credit check. Each check registers on your credit report. Too many of these notations can negatively affect your credit score.
Credit scoring models like FICO count similar hard inquiries that occur in a short time as a single inquiry. This grouping reduces the impact on your score.
Get pre-approved (versus pre-qualification) for an auto loan.
Preapproval is the first step in the application process. The lender will review all the information in your credit history and draft an estimate close to the final rate and loan amount you’ll receive upon final approval.
The estimate for preapproval is far more accurate than the one you’ll receive for pre-qualification. Pre-qualification, unlike preapproval, requires a soft credit check.
Soft credit inquiries don’t affect your credit score. They also don’t provide lenders with all the necessary information for a more accurate estimate. Most times, this pre-qualification will change drastically once the lender gathers all the information.
On top of being more accurate, preapproval grants you greater negotiating power with dealerships as it makes you a cash buyer.
Rework your budget with the information provided by the lenders’ estimates. Don’t aim to use all the pre-approved sum. You can use less when setting your vehicle’s price range.
Get an offer from the dealership.
Once you’ve reworked your budget with the pre-approved amount, you can shop for a car within your price bracket. Test drive and shop around until you find a vehicle that meets your needs for the best price.
Speak with the dealer about the financing offer they can provide. As I mentioned before, your preapproval gives you negotiating power.
Carmakers often partner with dealerships to set up banks only for auto purchases. Through this partnership, you can qualify for below-market interest rates. The auto dealer may see your preapproval and try to compete for your complete patronage.
– Always check the fine prints.
Read all the fine prints of the dealer’s contract. Check for:
- Hidden fees. The offer might be lower at first glance until you add up all the expenses for closing the loan.
- Loan term. A longer loan term means more interest payments.
- Add-ons. You might end up paying for more than you agreed on, like gap insurance, which you can find cheaper elsewhere.
- Early payoff penalties. Like your mortgage, skip any lender who penalizes you for clearing your debt early.
Some dealers are not as transparent as others. Be clear on what you’re paying for before signing any documents.
Finalize your loan.
To complete your application, you need to choose a car. The lender will ask for the purchase agreement, title, and registration. Make sure you also have other required documents ready, like your driver’s license, proof of income, and proof of residence.
Follow your lender’s instructions on how to complete the application and loan closing processes. If you choose the pre-approved route, the dealer may act as the middle man and contact the lender, or you may have to be the intermediary yourself.
III | Where to Apply for an Auto Loan
There are many ways you can seek financing for your vehicle purchase. Here are your options.
- National banks
- Local credit unions or community banks
- Online lenders that only provide auto loans
- Dealership financing
Your financing option depends on the rates, terms, additional fees, and your budget.
Banks and Credit Unions
Applying with a financial institution like banks and credit unions offers preapproval. You can secure the financing before searching for your dream car. Once you find the vehicle you want, the lender will guide you through the closing process to disburse the monies.
Banks usually offer higher rates than credit unions. Especially for new cars. Used vehicles are always cheaper to finance.
If you have an account at either, you may receive preferential rates if you agree to automatic loan payments from your account.
Dealership Financing
Financing through a dealer can be convenient. Qualifying for a loan might also be easier. They offer special incentives and deals often backed by the carmakers they work with. Ask for a quote and compare the rate, terms, and fees with your pre-approved loans.
Dealership rates may be higher than those offered at a bank or credit union because of additional fees and add-ons. The dealer can either hold the loan or sell it to a finance company, bank, or credit union.
Online Lenders
Some online auto lenders specialize only in auto loans. Restrictions apply on where you can buy your car, for instance, if you’re purchasing from a private party.
Approach online lenders as you would any other. Collect all the facts and read all documents before signing.
IV | How to Get an Auto Loan with Bad Credit
Borrowers with poor credit scores will always have difficulties finding low-interest rates, even from auto loan lenders specializing in serving clients with lower credit scores.
If you’re having trouble finding a loan interest rate that you can manage, here are some steps you can take.
Improve your credit score.
Pay down the balance on your current debts and bring your accounts up to date. Credit bureaus use your payment history in assigning your score. You’ll also want to avoid accumulating additional debt like applying for another credit card.
Paying your utility bills on time will gain you points.
Save for a larger down payment.
Paying a large deposit upfront will reduce the amount you have to borrow. This will lower your monthly payments and accumulated interest. It may also increase your favor with lenders, improving your loan offers.
Get a co-signer.
A co-signer with excellent credit can improve your chances. Your co-signer will be a guarantor that if you cannot pay, they’ll cover the outstanding balance.
Helping you qualify for a loan, however, will affect their credit. If you default, the full brunt of responsibility will fall on the co-signer, which may derail any future financial plans they had. Because of this, people shy away from becoming co-signers.
Make your payments on time when you have a co-signer. More so than if you were tackling the loan alone, as you’re now responsible for someone else’s credit.
V | Manage Your Auto Loan Responsibly
Your payment schedule begins once you receive the funds. Schedule automatic deductions from your account or notifications to make the payments manually, on time, and in full.
Late payments and defaults reflect negatively on your credit report. This information remains on your record for seven years. So do collections and repossessions if the lender claims the vehicle as collateral when you miss too many payments.
Building a positive credit history with on-time loan payments will stand in your favor should you require another loan.
Once you’ve paid in full, the lender will report your account closed, and this paid-up loan will vouch for your creditworthiness to future lenders.
Conclusion
Taking on any debt is an important decision. Make sure you gather all the facts. Comparison shop for the lowest rates and favorable loan deals. Understand the terms, conditions, and fees involved before signing. Turn down offers that don’t align with your budget.
If you have poor credit, strengthening your score, saving for a higher down payment, or enrolling a co-signer will help you find better auto loan offers.
Once the repayment term begins, make your deposits on time and in full. How you manage your loan reflects on your credit history.
