If you’re looking to purchase a new or used car, chances are good that you’re also in the market for an auto loan. There are some steps to take to best prepare yourself before applying for a car loan.
The question is, how do you get one?
While you’re probably spending more than enough time surfing the web in search of the perfect car for you, have you been doing the same to find yourself the perfect loan? If the answer is no, don’t worry! If you’re not totally sure where the start, these four questions will put you in the right position to search and apply for the right auto loan for you.
Where to begin when applying for a car loan?
When you start shopping for the right auto loan, there are several institutions you can approach.
Perhaps the most traditional places to seek out an auto loan are banks and credit unions. If you want a loan from your bank, you’re going to have the best chance to get the best loan if you are in good standing with your bank. As for getting a loan from a credit union, they typically offer favorable rates, but you have to be a member of the union in order to qualify.
Another increasingly popular place to look are online lenders.
Beyond that, other prospective borrowers decide to get an auto loan from the car dealership that they end up buying their car from. The best way to go about this is to get pre-approved for an auto loan before you go to the dealership. That will help you because it will give you confidence knowing that you already have a loan if you don’t get approved by your dealer. The main reason, however, is because that pre-approved loan will give you leverage to get your dealer to give you an even more favorable loan in terms of rates, payment terms, and more.
What should you consider when comparing auto lenders?
While all auto lenders have something things in common, they all have different criteria and factors that you should absolutely consider while testing the market. Finding the best auto loan for you can lead to very real savings in the end. Often, just a couple percentage points can lead to thousands of dollars saved.
For example, a $20,000 loan with a repayment term of five years will end up costing you $1,100 more if you agree upon a 6% interest rate versus a 4% interest rate. As long as we are talking about repayment terms, it is also important to note that while longer terms will cost you less in terms of month-to-month payments, a shorter term will almost always cost you less overall.
Another thing to consider in terms of getting an auto loan is to find out what types of car purchases they finance. Some lenders will only work with dealers that are affiliated with auto manufacturers, while others will also worth with independent and private dealers.
How do I get pre-approval on a car loan?
An auto-loan pre-approval is a pending offer based on the applicant’s financial and personal information. Pre-approval is not a guarantee that you will get the loan once you finally apply, especially if your finances or credit score changes, but it helps you dip your toes into the market.
Applying for pre-approval can take just several minutes online, but you’re going to have to be prepared to share some personal information with them. Typically, lenders who offer pre-approval are going to need your name, contact info, Social Security number, mortgage or rent payments, proof of employment and income, and the make and model of car you are interested in buying. It is possible that the lender will contact your employer or pull your credit score to verify the information you provide.
It’s important to keep in mind that will likely have a time limit and, as mentioned previously, could no longer be on the table if your financial situation changes. To find out moresee our guide to auto loans in 2019
How does your credit score play a role when getting an auto loan?
This should be no surprise, but to get the best auto loan rates, you’re going to probably need an excellent credit score. That doesn’t mean that you can’t get an auto with bad credit, however.
Some lenders use your credit score to help them decide whether or not to approve prospective borrowers, but that isn’t all they consider. They may also look at work history, residency stability, and monthly income to get a fuller picture of your financial situation.
Other lenders will approve borrowers with lower credit because they offer secured auto loans. That means that they use the car you plan on buying as collateral in the event that you end up defaulting on your auto loan.
There are a lot of ways to get around having a bad credit score, but you should be sure to review your own score and dispute any errors that you find before you go out and apply for a loan. This will help you get a better idea of what kinds of loans are available to you.
Following application, some lenders will be able to offer pre-approval with only a soft inquiry into your credit report. This won’t harm your credit score, but a hard inquiry will likely have an impact. Check with your lender regarding what time of inquiry they will carry out so you will not be surprised by a dip in your score as a result of a pre-approval.
One tip to avoid a dramatic impact on your credit score is to apply for all the loans you are interested in within one month of one another. If you do that, many credit scoring models will see all of those inquiries as just one, leading to a much smaller impact on your loan. Use this month to get pre-approved from the loans that interest you, and then finalize the deal by the end of the month with whatever loan offers you the most favorable terms.