How to Qualify to Get a Car Loan
Amid the coronavirus pandemic, auto debt balances grew in every US state. Climbing to $1.37 trillion, this marks a record high for auto debt in the United States.
Taking on debt can be a nerve-wracking but necessary endeavor in our modern world. Cars are expensive, and few people are able to pay for new cars out of pocket.
How easy it is to get a car loan has to do with your credit score, income, and a number of other factors.
Are you wondering how to get approved for car financing? Let’s take a look at everything you need to know.
- 1 Look Into Your Credit Score
- 2 Have a Source of Income
- 3 Have the Documents You Need to Verify Your Identity and Residence
- 4 Think About Getting Preapproved
- 5 Have a Trade-In or Down Payment
- 6 How to Get a Car Loan With Bad Credit
- 7 Learn About the Process of Dealer Financing
- 8 Work to Improve Your Credit Before You Apply
- 9 Car Financing: Is It the Right Choice For You?
Look Into Your Credit Score
If you want to get approved for an auto loan that has decent terms, you’re going to need a good credit score. The higher your credit score the better, but a good FICO score is generally considered to be between 670 and 739.
To determine your score, auto lenders usually use the models known as FICO 8 or FICO Auto Score. Sometimes, though, lenders will actually have their own set of rules they use to determine what rating they thing is good enough. You will have a pretty good chance of being approved if your credit score at least qualifies as “good.”
Sometimes, lenders will be willing to give you a car loan even when your credit isn’t great. However, it’s worth knowing that you might need a cosigner who has established, strong credit or charge you a higher interest rate.
There are some lenders out there that even specialize in lending to people with less than ideal credit. This comes at a cost, though, and these loans are typically pretty expensive.
Have a Source of Income
When you apply for an auto loan, lenders are looking to see if there is a high likelihood that you will make your monthly payments on time. When you have a steady income, it helps them feel confident that you will have enough money to pay when the bill arrives. You might need to provide documentation of your source of income depending on both your job situation and your lender.
For example, a W-2 worker might only have to submit a W-2 form or a recent pay stub. For people who receive Social Security, are self-employed, or have some other form of income, bank statements also might be required.
Have the Documents You Need to Verify Your Identity and Residence
When you work with a lender for the first time, they will likely want to obtain proof of residence and see a government-issued ID. The main reason that they want this information is because they want to know where the car is typically parked in case they are driven to repossess the vehicle due to payment default.
Different lenders can have different requirements, but they will usually require you to verify this information for them. A government-issued ID will typically verify both your identity and your residence. However, a lease agreement, utility bill, or bank statement could also work as proof of your address.
Think About Getting Preapproved
Not all auto lenders offer preapproval, but if your lender does you might consider applying for it. The process involves a lender running a soft credit check on you in order to decide whether or not you would likely get approved as well as the terms you might qualify for. Applying for preapproval can save you time if you learn that a lender isn’t interested in giving yu a loan.
Sometimes, lenders will require that you are applying for preapproval for a specific car, not just any car. Other lenders don’t require this of you.
Have a Trade-In or Down Payment
You can reduce the amount of money you have to borrow by trading in your current car or making a down payment. By lowering the amount of the loan, you can make it easier to get approved and lock in a lower interest rate.
You can trade-in your existing vehicle if it has value in order to receive credit from the dealer that can go towards the cost of the car you’re purchasing. For instance, if you’re current car has a trade-in value of $7,000, and you’re buying a car that costs $17,000, you only need to borrow $10,000 rather than the full $17,000.
Sometimes, people will have negative equity in their vehicle. This means that they still owe more money on the car than the amount that the dealer is willing to give in credit. In this instance, it’s required that the difference be paid to the lender immediately when the car is sold.
It can be convenient to trade in your car, but you likely won’t make as much money off of it if you trade it in rather than sell the vehicle to another private party. Some people find the convenience worth the lost money, though.
You can put money down towards your vehicle in order to pay for a part of the sales price. When you have a down payment, it’s common for lenders to view you more favorably. This is because they assume you will be less likely to default because you have already invested money in the vehicle.
When you pay a down payment, it reduces the amount of money you need to borrow. This also reduces the amount of your monthly payment as well as the interest you’ll pay over the life of the loan.
How to Get a Car Loan With Bad Credit
If you are trying to get an auto loan with bad credit, you will want to shop for lenders carefully. Find lenders that allow you to apply for preapproval and can give you terms that are relatively decent. It also helps to have a good trade-in value or to pay a good down payment to lower how much money you are asking to borrow.
You also might think about finding someone to act as a cosigner on the loan. This person should have excellent credit and an established credit history. When a person signs on to be a cosigner, it means they are agreeing to be equally as responsible for paying back the debt, which means that it can destroy both of your credit histories if you end up defaulting.
Make sure you read the terms of any loan you take out, but be particularly wary of lenders that loan to people with bad credit. The interest rate might be incredibly high, making the cost of the loan very expensive over time. You can learn more about car finance rates here.
Learn About the Process of Dealer Financing
If you are planning on getting financing through a dealer, it’s good to know what their financing process is like. At many dealerships, they end up reaching out to a number of different lenders simultaneously in order to get quotes. Make sure that you ask to see all of the quotes they received, not just their recommended quote.
There are sometimes special financing programs available to people from dealers that are sponsored by the manufacturer. Typically, you are required to agree to specific terms and have excellent credit for these loans.
Work to Improve Your Credit Before You Apply
When you’re looking for an auto loan, you’re hope is that you will get approved for a loan that has good terms. If you’re thinking about getting an auto loan in the future, start thinking about improving your credit now. You can check your credit score to determine if there are areas where you can improve your credit.
If you have big balances or any past-due payments, start reducing your debt and paying your bills on time. You can also make sure that there aren’t any inaccuracies on your credit report that might be secretly hurting your score. While it can take some attention and time, it is worth it to improve your credit.
Car Financing: Is It the Right Choice For You?
Whether or not it’s the best option for you to get a car loan depends on your personal financial situation. Paying cash for vehicles can eliminate loan fees and paying interest. It can also be a simpler and faster process, as no one likes to sit in the dealership dealing with financing paperwork for hours.
That being said, most people don’t have that kind of cash lying around. For that reason, financing can provide an essential tool for getting the car you want without paying for it all at once. It’s also a good idea to be aware of the value of the car you’re buying and the amount you are taking out in a loan, as making a down payment can help you avoid having negative equity in your vehicle.
Did you find this article about how to get approved for a car loan interesting? If so, be sure to check out the rest of our blog!