Prior to heading to the dealership, it’s smart to shop lenders and get preapproved so you can get the most competitive interest rate.
Make sure your credit report is accurate
How much and at what interest rate you are eligible to borrow depends on your credit score and income.
Check your credit report before applying for an auto loan. The lender may turn you down for a loan or offer you only a very high rate if your report contains errors or incorrect information, such as fraudulent activity.
The three major credit reporting bureaus (Equifax, Experian, and TransUnion) provide you with free copies of your credit report every year at AnnualCreditReport.com. In addition to being able to get your credit report weekly through December 2022, COVID allows you to dispute any 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, such as NerdWallet. Despite the fact that they are useful for gauging your progress, they are not considered by lenders to determine whether or not you are eligible for credit. Generally, lenders look at how you have repaid your auto loans based on specialized scores.
It is recommended that you spend six months to a year improving your credit if you have subprime or poor credit – usually less than 600 – before you apply for a car. In order to qualify for a better loan, you should make your payments on time and reduce your credit card balances.
Get an idea of the interest rates those with your credit score are paying with an average car loan interest rate.
The credit history of your borrower is as relevant to most lenders as the score of your current credit application. It is more likely that you will get approval or get a lower interest rate if you have paid off previous automotive purchases. However, short credit histories or no prior auto loans can adversely affect prime credit scores.
You’ll also need to show stable work history and meet minimum income requirements.
Multiple lenders are available for auto loans
Checking your credit is the first step toward looking at auto loans and lenders, which fall into the following categories:
- Large national banks, such as Bank of America or Capital One.
- Local community banks or credit unions.
- Online lenders that only provide auto loans.
- Dealership financing, or through automakers’ “captive” lenders.
Even if you’re planning on taking dealership financing eventually, you should compare quotes from the first 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 rate. Comparing auto lenders online is also an option.
It is critical to make sure each lender you consider allows private sellers to purchase cars rather than dealers or brokers. Before you apply for a car financing agreement, learning the language of car financing is also essential.
Pre-approval for auto loans
You should request interest rate quotes from a few lenders once you’ve narrowed your search. You will get the most competitive rate if lenders compete for your business. Additionally, car loan interest rate offers can vary widely due to the different factors considered by lenders when analyzing your credit report.
A lender can prequalify or preapprove you for a loan when you apply. Understanding the differences between them is crucial.
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. You may however notice a significant change in the estimated rate once your credit is checked in full.
There is a difference between prequalification and preapproval. Your credit score is temporarily lowered as a result of a “difficult” credit pull. Your estimated rate should be closer to your final rate since the lender has more information about your credit history and personal information.
It may be beneficial to get preapproved for an auto loan if you’re close to buying your car. This is because you have more negotiating power at the dealership and your interest rates are protected from being marked up. An inquiry counts as one when it is made more than once in a short period of time.
Your auto loan application is not guaranteed to be approved simply because you have pre-qualified or pre-approved. A pre-approval indicates to your dealer that you are a serious buyer able to secure financing and can assist in planning and budgeting for your car purchase.
Set your budget according to your loan offer
It is not the price of the car that you can buy that is stated in your preapproval offer, but rather the maximum amount you can borrow. Taxes and fees should be added to your budget by 10%. You can use an auto 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 are uncomfortable with that monthly payment. Generally, a preapproval offer is just a guideline for what you can afford – you can borrow less if you wish. Regardless of what your bank says, you must be sure that you can comfortably make payments on your loan.
Locate your vehicle
It’s time to pick out your new car now that you have financing offers and know your maximum financing amount.
- Ensure the loan offers include the following when choosing a car:
- Brands that are excluded. Electric cars, for example, are not usually funded by some lenders.
- Requirements for dealerships. There are some lenders, such as Capital One, that require dealers to belong to a particular dealer network before making a loan request.
- When buying a car from an individual, you must comply with the lender’s requirements.
- Restrictions on time. Loans are usually available for 30 days. The lender may extend the offer if the time runs out.
- Take a look at the dealer’s loan offer
- You may still be able to score an even better interest rate – from the dealer – if you take a test drive and find an automobile that meets your needs.
Dealerships often offer below-market interest rates to customers who purchase autos through the carmaker’s banks. The finance manager will try to beat the set rate you’re preapproved for once he learns you’re preapproved for it. Trying to lower your interest rate doesn’t hurt, and there’s no harm in applying.
You should still tell the salesperson you are already preapproved even if you do not wish to play the game. In cash-buying situations, you can negotiate just the car price, not the monthly payment, so you can haggle on only the price.
Make your loan choice and finalize it
The financing rate should be low compared to the rate you were preapproved for (and the other terms should be the same). It is okay if you accept the loan at hand regardless of what other offers you have. You should always read contracts carefully before signing them to ensure they aren’t sneaky.
Hidden fees are present. In addition to the car’s purchase price, there will be sales tax, documentation fees, and registration costs. It is important to question excessive fees.
A longer loan term is involved. An extension of even 12 months could result in hundreds of dollars in additional payments. Obtain a lower dealer rate if you can get a longer loan. In most cases, gap insurance can be found for a lower price if you don’t request it. A penalty is imposed for early repayment. An auto loan contract usually doesn’t have a clause like this, but it is a good idea to check.
In order to take advantage of your preapproved offer, you must follow the instructions provided by your lender. Some lenders may need to be contacted by you directly, while others may require you to contact them on your own.
Private sellers usually require cash or a cashier’s check when buying a vehicle. After selecting the car, contact the lender to figure out how to finalize the deal. Then, you’ll sign the paperwork. It’s still a wise idea to check the contract for the items above, but you’re much safer from add-ons when you don’t finance through the dealership.
Make payments on time
After your auto loan is locked in, you’re ready to drive off into the sunset. But don’t forget one more step — making on-time car loan payments. Your lender will most likely provide online access to your loan information, where you can set up automatic payments. Taking time to do this helps you build a history of on-time loan payments, an invaluable contributor to your credit score, and the ability to get a loan with better rates in the future.