Make sure your credit report is accurate
How much and at what interest rate you can borrow depends on your creditworthiness and income.
Check your credit report before applying for a car loan. The lender may reject a loan or only offer you a very high interest rate if your report contains errors or incorrect information such as fraudulent activities.
The three major credit reporting agencies (Equifax, Experian, and TransUnion) provide you with free copies of your credit report each year at AnnualCreditReport.com. In addition to the ability to receive your credit report weekly through December 2022, COVID allows you to dispute errors on your credit report. This is before applying for a car loan.
Scores are calculated from credit reports. Online credit scores and reports are also available for free through many banks, credit card issuers, and personal finance companies. Although they are useful for measuring your credit progress, lenders do not consider them to determine whether or not you are eligible for a loan. Generally, lenders will look at how you have paid off your car loans based on specific assessments.
It’s recommended that you spend six months to a year improving your credit if you have subprime or bad credit—usually less than 600—before applying for a loan. To qualify for better credit, make your payments on time and reduce your credit card balances.
For most lenders, your borrower’s credit history is just as relevant as the score on your current loan application. You’re more likely to get approved or get a lower interest rate if you’ve paid off previous car purchases. However, short credit histories or no prior auto loans can have a detrimental effect on prime credit scores.
You must also have a stable work history and meet the minimum income requirements.
There are several lenders available for car loans
Checking your credit score is the first step in looking at car loans and lenders that fall into the following categories:
- Large national banks like Bank of America or Capital One.
- Local community banks or credit unions
- Online lenders that only offer car loans
- Dealer financing or through the automaker’s “own” lenders
Even if you plan to use dealer financing at some point, you should compare offers from the top three lenders first. If you agree to automatic loan payments from your checking account at your bank or credit union, you may qualify for a preferential interest rate. Comparing car lenders online is also an option.
Car loan pre-approval
You should request interest rate quotes from a few lenders once you’ve narrowed down your search. You will receive the most competitive interest rate when lenders compete for your business. Additionally, auto loan interest rate quotes can vary widely due to the various factors lenders consider when analyzing your credit report.
A lender may pre-qualify or approve you for a loan when you apply. It is crucial to understand the differences between them.
Using a limited amount of information about your credit history, pre-qualification provides an estimate of your interest rate and loan amount. Your credit score will not be lowered by a pre-qualification credit pull, which is a “soft” pull. However, you may see a significant change in the estimated interest rate once your credit score has been fully reviewed.
There is a difference between pre-qualification and pre-approval. Your credit score will be temporarily lowered due to a “difficult” credit pull. Your estimated rate should be closer to your final rate because the lender has more information about your credit history and personal information.
It can be beneficial to get pre-approved for a car loan when you’re close to buying your car. You have more negotiating power with the dealer, and your interest rates are protected from markups.
There is no guarantee that your car loan application will be approved just because you are pre-qualified or pre-approved. A pre-approval shows your dealer that you are a serious buyer capable of securing financing and can help you plan and budget for your car purchase.
Set your budget according to your loan offer
Your pre-approval offer does not specify the price of the car you can purchase, but rather the maximum amount you can borrow. Taxes and fees should be added to your budget by 10%. You can use a car loan calculator to design your loan. Find the right monthly payment for your budget by entering your down payment, trade-in value, and loan term.
You don’t have to borrow the full amount if you don’t agree to this monthly payment. Generally, a pre-approval offer is just a guideline for what you can afford; you can borrow less if you want. Regardless of what your bank says, you need to be sure that you can comfortably pay your loan.
Search for your vehicle.
Now that you have financing offers and know your maximum financing amount, it’s time to choose your new car.
- When choosing a car, make sure the loan offers include:
- Brands that are excluded Electric cars, for example, are not typically financed by some lenders.
- Requirements for dealers. There are some lenders, such as Capital One, that require merchants to be part of a specific merchant network before submitting a loan application.
- If you buy a car from a private individual, you must meet the lender’s requirements.
- Time restrictions. Loans are typically available for 30 days. The lender can extend the offer if time runs out.
- Check out the dealer’s credit offer.
- You may be able to get an even better interest rate from the dealer if you find a car that meets your expectations during a test drive.
Dealers often offer below-market interest rates to customers who purchase cars through the automaker’s banks. The finance manager will try to beat the rate you were pre-approved for once they learn you were pre-approved for it. There’s no harm in trying to lower your interest rate, and there’s no harm in applying.
You should still let the seller know that you have already been pre-approved, even if you don’t want to play the game. With cash purchases, you can only negotiate the car price, not the monthly payment, so you can only haggle on price.
Make your loan choice and complete it
The financing rate should be low compared to the rate you were pre-approved for, and other conditions should be the same. It’s okay if you accept this loan, regardless of what other offers you have. You should always read contracts carefully before signing them to make sure they are OK.
Hidden fees exist. In addition to the purchase price of the car, there are sales tax, documentation fees, and registration costs. It is important to question excessive fees.
An extension of even 12 months could result in hundreds of dollars in additional payments. Get a lower dealer rate if you can get a longer loan. In most cases, gap insurance can be found at a lower price if you don’t request it. A penalty will be imposed for early repayment. A car loan agreement usually doesn’t contain such a clause, but it’s a good idea to check.
To take advantage of your pre-approved offer, you must follow your lender’s instructions. Some lenders may require you to contact them directly, while others may require you to contact them yourself.
Private sellers typically require cash or a cashier’s check when purchasing a vehicle. After selecting the car, contact the lender to find out how to close the deal. Then you sign the paperwork. It’s still a good idea to check the contract for the points above, but you’ll be much safer from add-ons if you don’t finance through the dealer.
Make payments on time
After your car loan is finalized, you can drive off into the sunset. But don’t forget one more step: paying the car loan on time. Your lender will most likely provide online access to your credit information, where you can set up automatic payments. If you take the time to do this, you can build a history of on-time loan payments, which will make an invaluable contribution to your credit score and the possibility of getting a loan with better interest rates in the future.