Car Loans
Are you in the market for an auto loan? Before you pick the first car that catches your eye, sign on the dotted line, and drive off the lot, you’ll want to do some legwork. Otherwise, you could end up with much more than you bargained for financially, in the form of excessive interest and a monthly payment that you can’t afford.
Types of Lenders
Unless you’re planning to spend months or years saving up, you’ll need to secure financing. There are three types of lenders you can choose from:
Traditional lenders
Banks, credit unions, and other large-scale financial institutions that offer auto loans fall into this category. If you choose to go with a traditional or direct lender, you have the option to either get preapproved to determine how much you can borrow or pick out the vehicle and then apply.
Regardless of which route you take, the lender will cut the dealership a check for the total amount of the vehicle, plus any applicable taxes, fees, and add-ons (minus the down payment). And from that point onward, you’ll be obligated to repay the loan to the lender.
The primary benefit of using a direct lender is the power it gives you as a buyer when negotiating the final terms and conditions of the purchase. Since you’re using funds from an outside party to purchase the vehicle, you’re perceived as a cash buyer in their eyes and can request the most favorable pricing they can afford to extend to you.
Online lenders
Want to take the hassle out of shopping for the perfect auto loan? Consider doing business with an online lender. Many have prequalification tools directly on their website, so you can apply with no impact to your credit score. Even better, online lenders allow you to complete the entire process, from application to funding, directly from your smartphone or computer. This is a convenient option if you’re strapped for time or always on the go.
And if you really want to maximize the online auto loan experience, use a loan search and comparison tool to explore a plethora of options that may be available to you at the tap of a fingertip. All you have to do is answer a few questions about your financial situation and income, and the tool will do the legwork for you.
In-house financing
Dealerships make it easy to get the financing you need in a jiffy, even if you haven’t shopped around elsewhere for a loan. While it may seem like a convenient option, there are a few drawbacks. For starters, they will only check with lenders from within their small network to select the loan offer for you. Furthermore, there’s always a possibility that you aren’t getting the most competitive rate and loan term that you may qualify for. So, if you settle for in-house financing, be sure you’ve done your homework to ensure that what they’re offering is the most ideal funding option for your situation.
Qualification Criteria
Credit
Afraid your credit score will prevent you from securing an auto loan? It’s true that lenders evaluate your creditworthiness when reviewing your application for financing. However, having less than perfect credit doesn’t automatically disqualify from getting approved. It just means that you’ll more than likely receive a higher APR. But if your credit score meets or exceeds the lender’s minimum criteria and your income is up to par, chances are you’ll be approved for an auto loan with their most competitive financing terms.
You should also know that there are lenders that specialize in providing auto loans to consumers with past credit issues.
Income
The loan amount you’re approved for heavily depends on your income. While the lender is concerned with your creditworthiness or the likelihood that you’ll repay the loan, they also want to know that you have the means to make timely payments each month.
How Long Will You Have to Repay the Loan?
You should expect a loan term of anywhere between three and six years, but longer timeframes may be available for larger loan amounts to make the monthly payments more affordable. It all depends on the lender and the terms and conditions of the loan they are offering to you.
But keep in mind that a longer loan term is more costly. Each month that you’re paying on the loan, the lender is collecting interest. And the more months you remit payment, the more interest you’ll pay.
Before You Apply
Check your credit
Visit AnnualCreditReport.com to access a free copy of your credit report. If you spot inaccuracies, address them right away by filing formal disputes with each of the three credit bureaus, which are Equifax, Experian, and TransUnion. This should be done before you apply for your loan to give yourself the best possible chance of being approved and receiving a decent interest rate. And it’s much better to know where you stand than to be caught off-guard when applying.
If you have several credit issues and aren’t in a rush to purchase a new car, it may be worthwhile to devise a plan of action to repair your credit. You’ll increase your odds for approval and more than likely qualify for more competitive financing terms.
Run the numbers
How much can you really afford to pay each month for your new ride? When running the numbers, don’t forget to factor in the cost of car insurance, gasoline, maintenance, and repairs. These are hidden expenses that can wreak havoc on your wallet if you don’t plan for them.
If you have no idea how much an auto loan will cost you, use a loan calculator to get an estimate of the total cost and monthly payments based on a ballpark figure of how much a car seller is quoting for the car you are looking for. Total costs could vary drastically depending on the interest rate and loan term, but you’ll at least have an idea before applying.
Shop around for loans
It’s never a good idea to settle for the first loan that you’re approved for. Instead, shop around to see what loan offers are out there. And don’t worry about damaging your credit score. According to myFICO, multiple applications for credit are lumped into a single hard inquiry as long as you select a product within a 45-day window. Simply put, you’ll only receive one hit to your credit score, usually between two and five points, rather than several hits for each application. This is known as rate shopping.
Get preapproved
A loan pre-approval allows you to take the guesswork out of the equation by knowing exactly how much the lender will finance. It also gives you peace of mind that you’ll actually be able to secure the car of your dreams when you finally find it as you’ve already taken the proper actions to cut the red tape.
When seeking a preapproval, you don’t need to have the exact make and model of a vehicle in mind. The purpose is to determine how much you qualify for. And to move forward, the lender will need the following information:
- Name, address, email, and phone number
- Social Security Number and date of birth
- Employer’s name, address, and contact information
- Income and debt details
Find a vehicle
Shopping for your ride is arguably the best part of the entire process. But when conducting your search, be sure to keep the loan limit listed on your preapproval letter in mind. The dealership (or even private seller) may try to talk you into paying more for what you “deserve”, but blowing your budget only means you’ll pay much more than you can reasonably afford.
Also, be mindful of the lender’s requirements when shopping around. Some lenders have age and mileage requirements. An older vehicle with high mileage could equate to a less favorable interest rate or a shorter repayment period.
Negotiate with the dealership
Dealerships generate a nice portion of their revenue from the in-house financing department. So, don’t be surprised if they strongly encourage you to finance your new ride through them. You have the option to decline their offer, but it may be worth a shot as they might beat the rate you received through the bank or online lender.
But if they can’t and you still wish to finance the loan in-house to take advantage of the dealer incentives, the preapproval gives you grounds to negotiate a better deal. You can also always take the loan to get the perks and then refinance it with a different lender at a later date.
Finalize the loan
Before you sign on the dotted line, carefully review the terms and conditions of the loan offer. If there’s anything that you aren’t clear on or don’t understand, don’t hesitate to ask questions to clarify your doubts.
How to Save on Auto Loans
Boost your credit score before applying
A few ways to whip your credit score into shape sooner than later:
- Get current and stay current on any past due obligations. Payment history accounts for 35 percent of your credit score. And each time you let an account reach 30 days past due, it is reported to the credit bureaus, which could tank your credit score by up to 110 points. And the higher your score was before the mishap, the more damage you’ll incur. So, if you have any past due accounts, work with the lender to devise a payment plan that will help you get current. For all other accounts, continue to make timely payments.
- Reduce your outstanding debt balance to lower your credit utilization ratio. Amounts owed on revolving or credit card debt account for 30 percent of your credit score. For example, if you have a $1,000 line on your credit card and you have an outstanding balance of $500, your credit utilization ratio is 50 percent. And the higher the percentage, the lower your score. So, try to get this amount as low as possible before applying.
- Refrain from applying for new credit. Each time you apply for new credit, a voluntary or hard inquiry is generated. Hard inquiries drop your credit score by two to five points on each occurrence. This means that it’s probably not a good idea to go on a shopping spree at the mall by opening up credit cards at every department store.
- Make a down payment. The higher the down payment, the lower the loan amount. Even if the lender is willing to extend financing at 100 percent, it’s a good idea to put money down if you can afford to do so. You’ll lower the total loan amount and save a bundle on interest.
Opt for a shorter repayment period
A longer loan term means more time for the lender to collect interest from you. So, go for the shortest repayment period that you can comfortably afford or consider a vehicle that’s cheaper so you can afford the payments that accompany a short repayment window.
Accelerate loan repayment
If you decide on a lengthier loan term, revisit your budget and find ways to free up funds so you can repay the auto loan faster. This could mean cutting your grocery budget in half, disconnecting cable television for a while, finding a cheaper phone plan, or limiting how much you eat out. And if you want to pay off the loan even faster, try doubling up by remitting a payment every two weeks or using those financial windfalls, work bonuses or unexpected influxes of cash to help you reach the finish line faster.
As long as there aren’t any prepayment penalties, you’ll save a nice sum of money as you won’t be paying unnecessary interest.
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