Most people apply for an auto loan at least once in their life. Even if you prefer paying cash for the majority of your purchases, chances are that you don’t have enough stashed away to buy your car free and clear, and even if you do, you might not want to drop a lump sum all at once.
Getting an auto loan can put you a step closer to the car you want. Although the process is fairly routine, preparation can ensure the quickest and simplest process.
1. Get pre-approved for an auto loan
There is no rule that says you have to get pre-approved when shopping for a car. However, getting pre-approved has many benefits. You’ll learn in advance whether you can qualify for a vehicle loan, as well as how much you can afford to spend on a car.
Getting pre-approved may seem unnecessary. But the last thing you want to do is fall in love with a car that you cannot afford. This process is completely different from a pre-qualification. With a pre-approval, the lender will pull your credit report and review your income to determine how much you can receive from the bank. It removes any guesswork, allowing you to only consider cars within a certain price point.
And while you’re getting pre-approved, it’s also a good idea to compare auto loans between two or three banks. Auto loan rates vary by lending institution and comparison shopping is the best way to ensure the lowest rate possible.
2. Work with the right lender
When buying a car, it’s also important to work with the right type of lender. If you find the perfect car at a dealership, you can secure a loan through your personal bank, or you can work with the dealership’s financing department.
Some people choose to work with the dealership’s financing team. Understand however, the dealership doesn’t write loans. They have partnerships with a multitude of banks and they connect buyers with the most appropriate lenders.
“The dealership writes the loan, but effectively, we’re the bank,” says Consumer Portfolio Services founder and chief executive Charles E. Bradley.
Therefore, having bad credit won’t necessarily prevent a vehicle loan. In this case, it’s all about finding a lender who works with your particular credit situation.
3. Do your market research
Whether you’re buying from a dealership or a private party, market research is crucial to getting the best price for your car. This will involve a little homework on your part. However, if you can negotiate the best price for the car, it’ll reduce how much you need to finance, thus lowering your monthly payments.
The dealership’s goal is to get as much as possible for the vehicle; but in most cases, you can drive away with a new car and pay less than the sticker price. The first thing you need to do is compare car prices among different dealerships, and then ask dealerships to beat your best price. You can also compare average transaction prices for your area online so that you know what others have paid for the same car.
If you’re buying from a private party, using Kelley Blue Book to check the vehicle’s worth based on the make, model, mileage and condition can help you determine the overall value of the car.
4. Gather your salary information.
You might have good credit, but if you don’t earn enough income, a car loan won’t happen. Be prepared to show the lender your most recent paycheck stubs, and the bank may call your employer to confirm your salary and position. Additionally, if you’re self-employed the lender may need to see two years worth of tax returns.
Getting a new car can provide reliable transportation, but you can’t always sign and drive away in a new car. If you know what you can afford beforehand, and if you work with the right lender, you can find a low, attractive financing package.