If you can’t afford to pay cash for a new car and don’t have enough time to save up, an auto loan may have to do. Fortunately, it only takes a few minutes of your time to apply and get approved so you can be on your way in your new ride.
Keep in mind that interest rates vary drastically by the lender as some cater to those with stellar credit while others are more lenient and will approve you even if your credit score is in the trenches. Consequently, you must do your due diligence to get the best possible rate and save yourself hundreds, if not thousands, over the life of the loan.
Ready to get started on your car loan search? Follow this step-by-step approach to place yourself in the best position to secure competitive finance on your next car purchase.
Step 1: Research Lenders
When searching for an auto loan, you should research traditional, online, and in-house lenders.
Traditional lenders
Traditional lenders include large-sized banks, regional banks, community banks, and credit unions. You have the option to get a preapproval before car shopping to determine the maximum amount they will lend you for an auto loan. Or you can visit a branch once you’ve found the perfect ride to apply for a loan and iron out the details if you qualify.
Either way, upon final approval, a traditional lender will pay the dealership directly to cover the cost of the vehicle and you’ll pay them each month until the loan is paid in full. But if you’re purchasing from a private owner, the lender will give you the check to pay them for the ride. The lender will also have rights to the vehicle or hold the lien since the vehicle is technically their property until you pay it off.
Online lenders
The beauty of using an online lender is that you can handle the entire loan process from start to finish on your desktop, laptop, or mobile device. Even better, many online lenders offer pre-qualification tools that allow you to inquire about financing without impacting your credit score.
In-house financing
Dealerships prefer that you use their in-house financing department because they make a hefty amount on these auto loans. However, you shouldn’t feel obligated to do so unless they’re offering you the best rate and the fees are comparable to what you’d find with other lenders.
Which type of lender is best?
It depends on your financial situation and what you’re looking for in a lender and car-buying experience. If you have squeaky clean credit, stable income, and money to put down if needed, chances are you’ll secure competitive loan offers from all types of lenders.
By contrast, if your credit history is a bit shaky or you don’t have much cash for a downpayment, your options may be a bit more limited. So it’s always a good idea to chat with the lender about your unique financial situation before applying to determine if they have options for consumers with similar financial backgrounds.
If you decide to use a traditional or online lender, you’ll have more bargaining power as you’ll be viewed as a cash buyer. But in-house financing could mean more incentives from the dealer, and they may have loan options you qualify for if you have less than perfect credit. And online loans are also easier for credit-challenged borrowers to get, and they make rate shopping a breeze.
Step 2: Understand Qualification Criteria
Most auto lenders will gauge if you’re a good fit for an auto loan by checking out your credit rating and income. They want to feel confident that you don’t pose too much credit risk, and if so, the lender will more than likely charge you a higher interest rate to offset the risk of loss if you default on the loan.
And what’s equally as important is that you have the income to cover the monthly auto loan payments along with your other existing financial obligations. If your existing debt to income ratio is already really high, that you could be a sign that a new auto loan could take you over the top, and the lender may deny your application or reduce the loan amount so your monthly payment will be affordable.
Step 3: Check Your Credit
You want to give yourself the best chance at securing a low-interest rate on an auto loan. And because lenders use your credit rating to determine the rate you qualify for, it’s pertinent that your credit report is free of inaccurate or untimely information since the information in your file is what determines your credit score.
To find out, head over to AnnualCreditReport.com to retrieve copies of your credit report from the three credit bureaus. If you spot issues on your report, file disputes with Experian, Equifax, and TransUnion right away.
In the meantime, it may be worthwhile to pay down outstanding balances and get current on any accounts that are delinquent to boost your credit score before applying.
Scenarios
Assume you take out a 4-year (or 48 months), $25,000 auto loan. The following scenarios demonstrate how your credit rating can impact your monthly payment and the amount you expend in interest over the life of the loan.
| Credit Rating | Interest Rate | Monthly Payment | Total Cost of the Loan | Total Interest Paid Over the Life of the Loan |
| Excellent | 4% | $450 | $27,095 | $2,095 |
| Good | 6% | $587 | $28,182 | $3,182 |
| Fair | 8% | $610 | $29,296 | $4,296 |
| Bad | 12% | $658 | $31,601 | $6,601 |
| Poor | 18% | $734 | $35,250 | $10,250 |
Step 4: Determine How Much You Can Afford
When you work with a lender to obtain a pre-approval, they will communicate how much they think you can afford to pay each month. But only you know the exact figure that you can comfortably afford to fork over each month for a car payment.
For this reason, you should sit down and run the numbers. Whip out your spending plan and determine how much disposable income you have each month, after stashing some cash away, to allocate to a new auto loan. Don’t yet have a budget? This handy guide will get you started.
Once you reach a concrete number, deduct the cost of auto insurance, gasoline, maintenance, and repairs. This figure is what you should use to calculate the maximum purchase price. If it’s not quite what you expected, you have the option to put more money down to lower the loan amount and monthly payments.
Also, keep in mind that a short loan term could mean that your payments are steep. But you’ll save a bundle in interest. What’s most important is that you focus on the purchase price and not the monthly payment, to avoid getting into an auto loan that seems like a good deal, but will cost you several thousand in interest over the life of the loan.
Step 5: Select Tour top Lenders
Narrow down your list from step one to your top three selections and gather the necessary information to apply. During the application process, expect to provide:
- Your name, physical address, email address, and phone number
- Your date of birth and Social Security number
- Your employer’s name, physical address, and phone number
- Information about your source of income (including how much you’re compensated and the frequency) and select debts
If applying online, you’ll be able to upload any required documentation electronically. But if you’re using a traditional or in-house lender you may be allowed to email the documents directly to the lender.
Step 7: Shop For a Vehicle
To finalize the loan terms, you’ll need to provide details on your vehicle of choice. But before you do so, negotiate with the dealership to get the best possible purchase price on the ride. This could also mean retrieving a rate quote from their in-house financing department in hopes of locking in a better rate than what you’ve received from other lenders.
Step 8: Iron Out The Loan Details With The Lender
Before you seal the deal, you’ll need to decide on a loan term and ensure that you’re getting the best possible interest rate. If you like a particular lender but they’re not willing to budge on the interest rate, present offers from their competitors to see if they’ll lower their rate in an effort to earn your business.
And if you have any questions regarding the loan details, you should ask before moving forward. But if you’re comfortable with the fine print, sign on the dotted line and seal the deal.
Can’t Get Approved for an Auto Loan?
Inquire with the lender to find out why you were denied. You have a right to request a copy of the credit report used to make a lending decision within 60 days.
If your credit is an issue, here are some tips to improve your score and increase your approval odds:
- Make timely payments on all your debts since payment history accounts for 35 percent of your FICO score.
- Minimize your credit utilization ratio since amounts owed are responsible for 30 percent of your FICO score.
- Don’t open new credit cards. Each time you apply for credit, a hard inquiry is generated and decreases your credit score by two to five points.
As a last resort, you can offer to put more money down or try another lender that caters to subprime borrowers with less than perfect credit.
The Bottom Line
You don’t have to settle for the first auto loan offer that comes your way. Instead, do your homework to see how the terms from various lenders stack up and select the option with the most competitive rate and that best suits your needs.
