How to Qualify for a Car Loan
The number of variables banks consider when making a decision on a financing request will largely be based on your credit score. However, other factors are also taken into consideration.
Make Sure You Have Good Credit
Having a good Credit Karma Score ☉ will help you obtain a loan with good terms. The overall Credit Karma Score ☉ ranges from 670 to 739, and a higher score is even better.
Auto loan firms typically utilize the FICO 8 or FICO Auto Score details to figure out your credit score. Keep in mind, though, that lenders may conduct their credit score checks for reasons not entirely associated with lending. Still, if your FICO score is in the decent to excellent range, you’ll have a better than average possibility of being approved.
And let lenders approve you for a car loan even if you have a less-than-perfect credit. But they may charge you a higher interest rate or require a co-signer with strong, established credit. Some loan providers specialize in financing individuals who have low credit, but these loans tend to be expensive. Work on improving your score before applying for a loan.
Have a Source of Income
Having a steady income is critical to auto lenders because it boosts the likelihood that you’ll make your monthly payments. Depending on your lender and your position, you might need to present more than one type of documentation.
If you’re a W-2 employee, as an example, a recent pay stub or W-2 form will probably suffice. If you’re self-employed or receive Social Security or other similar types of income, however, you may need to provide bank statements.
As soon as you are authorized, speak with the lender early so that you know what documentation you’ll need in order to speed up the process.
Be Able to Prove Your Identity and Residence
If your loan is from a bank or credit union that you regularly use, you may not necessarily need to provide this information. If you’re working with a lender for the first time, however, you will need to provide a government-issued ID and proof of residence.
Staff typically has to know where the car is to be stored should a default occur.
Again, requirements can vary depending on the lender, but in general, your driver’s license or another government-issued ID with your present address can suffice. If you don’t have that, you can also find out with a utility statement, lease agreement, or bank statement with your address on it.
Consider Getting Preapproved
In the auto loan preapproval process, a lender will pre-approve you before purchasing a vehicle or leasing it, thus giving you a pretty good idea of whether you will be approved for the loan and what interest rate and other terms you could qualify for. If you don’t get preapproved, then it would be wise not to waste your time applying.
Getting preapproved doesn’t have an effect on your credit score since there’s a soft credit check. If you go through this procedure with several lenders, there’s also an opportunity to compare different lenders to determine which one will give you the best terms for a loan.
Bear in mind, though, that not all automobile lenders provide preapproval. Additionally, some may need that you have a particular automobile in mind, while others do not need it.
Have a Down Payment or Trade-In
Making a down payment or trading in your current car decreases how much you are required to borrow and makes it more likely that you will be approved at lower interest rates. Here’s what you need to know about each particular option.
You give the lender a down payment to help cover a share of the sales price of an automobile. Lenders tend to consider borrowers with down payments favorably because it signifies that they’re looking forward to the buy and less likely to default.
Because a down payment lowers how much you need to pay, it also decreases your monthly payment and total interest charge.
For instance, if you’re buying a new vehicle with a value of $15,000, and sell an older vehicle for $8,000, you will only need to make a partial payment on new cars worth $7,000.
If you owe more on the car than the dealer offers for trading it in, you have a negative equity, and that means you’ll have to settle that difference immediately to your lender upon the sale of the automobile.
Trading in your car with a dealer can be convenient, but you will receive less than you would have for a private sale. If you don’t have time to sell your car, either way, and you don’t have negative equity, the convenience may be worth it.
Understand How Financing at a Dealer Works
It is crucial to know how to a car dealer handles financing. Many dealers contact multiple lenders when they need to use financing to get quotes from multiple lenders. Ask for the actual quotes from all the lenders rather than only the one the dealer chooses.
Some suppliers may offer financing programs to vehicle buyers that are sponsored by the manufacturer. These deals generally require that you have good credit and agree to certain terms.
Qualifying for a Car Loan With Bad Credit
In comparison, auto loans are available for individuals with bad credit.
To get an auto financing with poor credit, conduct some research on the lenders that provide pre-approvals and give favorable terms. Also, attempt to get a good down payment or trade-in value to help lower your borrowing requirement.
Consider getting used as a co-signer by a pal or family member with a sound reputation as a way of acquiring a better auto loan. Keep in mind that your co-signer is equally responsible for paying off the loan if you default, which will affect both of your credit histories if you aren’t careful.
Work on Your Credit Before Applying
If you have a good credit rating, you’ll get approved for a better auto loan with good terms. When you don’t require a new car quite yet, examine your rating to see where you stand, then focus on areas where you can improve.
For example, get caught up on any past-due payments and pay off outstanding debt on credit cards. Apart from this, check your credit for possible errors that you can dispute with the credit bureaus. Improving your credit will take time, but it can save you a lot of money.