At a Glance:
Getting the right car loan is just as important as looking for the right car to buy.
Getting a car loan should begin by setting a budget and assessing your credit standing. You can then get preapproval offers.
Compare the different offers, find the most preferable rates, then select the car.
Next to buying a house, a car is probably the next biggest purchase you will make in your life. And just like availing of a home loan, you need to consider a few important things before getting a car loan. First, you need to know the impact of a car purchase on your overall finances, and how it will affect your credit standing.
There are impulsive buyers who can quickly make a buying decision after seeing a car they like. Although most car buyers do research on their preferred car make and model before visiting a car dealership, not too many bother checking their financing options.
A good way to save money even before your first visit to the dealership is getting approved for a car loan. This will help you get the best value for your car purchase. To get favorable rates on your car loan, you need to know the factors to consider when comparing loan providers, as well as your financial standing.
Read the rest of this post to learn how to get approved for a car loan, and how you can stay financially stable as you build your credit.
Bank or Credit Union vs. Car Dealership: Where to Get a Car Loan
The main advantage of getting a loan from a credit union or bank is the lower interest rates compared to car dealerships. Thus, it is better if you are eligible for a bank loan if you want a more favorable rate for your loan.
Is It Difficult to Qualify for a Bank Car Loan?
To qualify for a bank loan, you need to prove that you have a stable income. For most lenders, the latest payslip is acceptable as proof of income. Having a good credit rating can also help you get a car loan, although there are lenders that also cater to borrowers with low credit ratings.
What Information Do Banks Require for a Car Loan?
When evaluating car financing applications, banks would require proofs of identity, residency, income, as well as insurance coverage. Your vehicle information and Social Security number may also be required.
How to Get a Car Loan: Step by Step Guide
A car is a big-ticket purchase that requires careful thought. Shopping around for reputable lenders and getting prequalified offers can help you land the best deal.
To get the most favorable interest rates, follow the guide we have outlined below:
Step 1 - Assess your credit standing.
The typical qualifying credit score minimum for a car loan is 600. However, the actual minimum that lenders require may differ, depending on the loan provider. If your credit score falls under 600, your best option would be to look for a car loan specifically for those with bad credit or low credit ratings but with higher interest rates.
To get a copy of your credit report from any of the 3 major reporting agencies (Experian, Equifax, and TransUnion), just visit www.annualcreditreport.com. Likewise, TransUnion and Equifax reports are always available on Credit Karma.
Step 2 - Apply with various lenders.
After assessing your credit rating, check out the available lenders. These lenders can be categorized as big national banks, credit unions or local community banks, online lenders (specifically for car loans), and dealership financing.
Shop around and apply with different lenders to help you land the best interest rates. Try to shop around within a period of 14 days. This way, there will be just one hard credit inquiry on your records.
As much as possible, compare options from big banks, local banks/credit unions, and online lenders, even if you intend to eventually avail of dealership financing. Banks may offer preferable rates, particularly if you have a checking account with them that you can use for automatic payments. Online auto loan providers may also be considered if they offer low interest rates.
If you want to purchase from a private party, and not a dealer, make sure that it is amenable to your preferred loan provider because some would specify where you can buy from. Also, be familiar with car financing jargon before proceeding.
Step 3 - Get car loan preapprovals.
Before heading to a car dealership, try to get preapprovals from your shortlisted banks, credit unions, and online lenders first. This serves as your guarantee that the lenders are willing to extend the loan. Try to get preapproved with various lenders so you can compare.
While a dealership may extend financing help, it is best to have preapprovals from banks just to be sure. This is because dealerships are notorious for charging higher interest rates.
Getting preapproval is quick and can take as little as half an hour. This way, you can shop around faster. Before going to a dealer, request for auto-financing prequalification to determine if you qualify. This has no bearing on your credit rating, anyway.
Step 4 - Compare your preapprovals, then determine a budget.
A preapproval offer indicates the maximum amount you can loan. Note that it’s not the purchase price of the car. Provide a 10% allowance for taxes and fees. You can use an online auto loan calculator to estimate your total cost. Consider your down payment, your current car’s trade-in value, and loan terms to come up with a monthly amortization that’s within your budget.
A realistic budget is key to making the purchase work out. Try to limit your monthly car loan payments to 10% of your monthly net income, and set aside 20% for car expenses like parking, insurance, maintenance cost, and toll fees, among others.
If you find the computed monthly payments too high, you can try borrowing an amount lower than your preapproved amount. Your monthly amortizations will be smaller this way.
Step 5 - Accept the best offer.
Make sure to prepare all required documentation beforehand, and accept the most preferential offer. Required documents include your driver’s license, proofs of income, residency, and insurance. Also, include your preapproval documents. Be ready to make a down payment if it’s required.
Step 6 - Choose your car dealership.
After all the hard work, it’s now time for the best part. Pick the vehicle you want to buy, then complete the required paperwork. Pay the down payment after you have agreed on the final purchase price and the terms. The lender will then send details of the loan and the payment terms, typically by email.
Step 7 - Make timely payments.
Make sure to meet your monthly loan obligations. If the lender allows it, you can set up automatic online payments to make sure you don’t miss a payment. Making timely monthly payments can help boost your credit rating. A better credit score will allow you to obtain better interest rates in the future.
Getting a good car loan is just as important as buying a car itself. Thus it is important to know the factors to consider in choosing the most favorable loan. Follow the guide we provided in this article to get the best loan you can afford.
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