Follow these eight steps when applying for an auto loan to get the best deal.
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In order to get a car loan at the highest interest rate, it is crucial to take certain processes including comparing lenders and getting pre-approved before going to the dealership.
1. Check your credit history
Your ability to borrow money and the interest rate you will be charged will be determined by your income and credit score.
Applying for an auto loan without first reviewing your credit report is a bad idea. If your report contains any false or inaccurate information, such as fraudulent behavior, you may not be approved for a loan or will only be offered a very high interest rate.
Each of the three major reporting agencies (Equifax, Experian and TransUnion) requires you to provide a free copy of your report to AnnualCreditReport.com once every 12 months. You can now request a copy of your credit report every week until December 2022 (thanks to COVID). Before you apply for a car loan, you should check your credit report for errors or indications of fraud and file a dispute to correct them.
Credit scores are derived from credit reports, which serve as their basic data. Numerous banks, credit card companies and personal finance websites, such as NerdWallet, also offer free access to online credit scores and reports. While they can be helpful tools for tracking your progress, lenders may not use these scores to accept you. Most auto loan lenders employ customized scores that reflect your history of on-time auto loan repayments.
If you don't need a car right away and your credit is subprime or poor (typically a score of 600 or below), you may want to wait six months to a year before applying. Your credit can be improved so you can be approved for better loans by making on-time payments and reducing your credit card balances.
To get a rough idea of rates for people with your credit score, Google averages auto loan interest rates.
Your credit history is just as important to most lenders as your current credit score. That is, if you have successfully paid off previous auto loans, you are more likely to get approved or get a lower interest rate. On the other hand, a lack of prior vehicle loans or a short credit history can lower a major credit score.
You must have a consistent work history and meet minimum income levels in addition to credit requirements.
2. Apply for several auto loans
After checking your credit, it's time to consider vehicle loans and lenders that fall into one of the following categories:
- Large national banks like Capital One or Bank of America.
- Bank or credit union in your area.
- Online lenders that only offer auto loans.
- Dealership financing or "captive" lenders used by automakers.
Even if you ultimately decide to use dealership financing, you should first compare quotes from the first three categories of lenders. If you agree to have your loan payments automatically deducted from your own bank or credit union checking account, they may offer you a preferred rate. Additionally, you can research auto lenders online.
Check with each lender you're considering to see if they're allowed to buy your car directly from a private party—as opposed to a dealer or broker. There are some restrictions on where you can buy a car.
Before you apply for a loan, spend some time familiarizing yourself with the terms used in vehicle financing.
Apply for a car loan from one of these lenders.
3. Get an auto loan pre-approved.
Request interest rate quotes and compare offers once you've narrowed down your search to a few lenders. To get the best rate, encourage lenders to compete for your business. Additionally, car loan interest rates can vary widely because lenders give different weights to different elements of your credit record.
You can be pre-qualified or pre-approved for a loan before you submit an application to the lender. They are distinct, and it is important to understand what they mean.
Based on what little knowledge the lender knows about your credit history, pre-qualification gives you an idea of the rate and loan amount for which you may qualify. Pre-qualification involves only a "soft" credit draw; As a result, it has no negative effect on your credit score. However, once a thorough credit check is completed, the expected rate you are quoted may change significantly.
Pre-qualification comes before pre-approval. Your credit score will drop briefly because a "hard" credit pull is required. The predicted rate should be closer to the actual rate you will get after loan approval because the lender has more knowledge of your credit history and the personal data you submit.
Getting preapproved for an auto loan has many benefits, including giving you more negotiating power at the dealership and protecting you from mark-up rates, if you're really ready to buy your automobile.
Hard credit inquiries that are made more than once only count as one inquiry.
Shopping auto loans: preapproval vs. pre-qualification |
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Preapproval means a lender has reviewed your credit report (not just the score) and other information to determine a loan amount and rate you’re likely to receive. You'll likely get the offered rate (your car must also meet the lender's criteria). Makes you a “cash buyer” at the dealership.
| Pre-qualification means you're likely to receive a loan at a given rate (or within a wide range) based on limited personal and financial information. It's not an offer to fund you. Pre-qualification quick facts: Estimated rate may change based on full credit check. Often has a wide range of interest rates you could qualify for but doesn’t guarantee any.
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Your auto loan approval is not guaranteed by pre-qualification or pre-approval. Both can help you plan and budget for your automobile purchase, but preapproval gives the dealer more confidence that you're a serious customer who can arrange financing.
4. Establish your budget using loan offers.
The maximum loan amount mentioned in your pre-approval offers is not the value of the car you can buy. To cover taxes and fees, add 10% to your budget. To build your loan, use an auto loan calculator. To determine the monthly payment that best fits your budget, enter your down payment, the trade-in value of your current vehicle, and the loan terms.
Note that the pre-approval offer is only a cap; If that payment is too much for you, you can borrow significantly less. Even if the bank claims that you can afford more, being able to make your loan installments comfortably is important enough.
5. Locate your car.
It's time for the exciting part: choosing your new car. You now have financing offers and know the highest car price you can afford.
Once you have your heart set on a vehicle, be sure to carefully review financing offers for:
- Banned brand. Some lenders refuse to back certain automakers or vehicle categories, such as electric vehicles.
- Dealership Specifications. Some lenders, such as Capital One, insist that you conduct your research through a specific dealer network.
- Requirements for lenders if you want to buy a car from a private seller.
- Time constraints. Most of the lenders give you 30 days to use the loan. Call the lender to extend the offer when you're running out of time.
6. Check the dealer's loan offer.
You may still have a chance to get an even better loan rate from the dealer after you've done a test drive and discovered a vehicle that suits your needs.
Automobile manufacturers established their own banks that are just for dealership-based auto purchases, and they occasionally provided below-market loan rates. The finance manager will probably try to undercut that rate once he learns that you have been preapproved for a specific rate in order to win your business. Applying to see how low your interest rate can go is not harmful.
Additionally, be careful to tell the seller that you are already pre-authorized even if you don't want to play the game. To negotiate only the price of the car and not the monthly payment, let the dealer know that you are a "cash buyer."
7. Select and complete your loan
You can be sure you're getting a great financing rate if the dealership beats your pre-approved rate (other things being equal). You can reject your other offers and accept that loan. Be sure to read the contract carefully before signing to make sure there are no deceptive clauses, such as:
- Hidden Costs You'll pay sales tax, a documentation fee and registration fee in addition to the price of the vehicle. Please ask about any additional costs.
- A long loan period. The cost of extending your loan term by 12 months can increase significantly depending on the APR. Don't accept long loans in exchange for low dealership rates.
- Undesirable for extras like gap insurance, which is usually less expensive elsewhere.
- A fee for early repayment. Although double-checking is essential, most contracts for auto loans do not.
If you decide to use your pre-approved offer, complete your loan application as directed by the lender and close the financing. Occasionally, a dealership representative will contact the lender to initiate funding; Other times, you have to do it yourself.
Private sellers are more likely to demand cash or a cashier's check if you're buying a car from them. Once you have decided on the car, you must contact the lender again to determine how to complete the deal. After that you will sign the papers. When you're not financing through a dealership, you're much safer from add-ons, but it's still a good idea to review the contract for the items mentioned above.
8. Make payments on time
Once your auto loan is secured you are ready to close. Paying off your auto loan on schedule is another thing you should keep in mind. Most likely, your lender will give you internet access to your loan details so you can set up automatic payments. By taking the time to do this, you can establish a history of making timely loan payments, which is important for your credit score and your chances of getting a loan with better terms in the future.
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