Start Driving: How to Apply for a Car Loan in 7 Simple Steps
A shocking $1.2 trillion — that’s the total outstanding balances of all auto loans in the US in 2020.
A major reason for this is that new vehicles in the US now cost almost $38,000 on average. Only very few people can afford to shell out that kind of money in one go, so most car buyers rely on auto loans.
As such, if you’re part of the majority, it’s best to familiarize yourself with the steps on how to apply for a car loan. This way, you can boost your chances of getting a “YES!” from an auto loan lender.
Ready to drive home that dream car without straining your finances on an expensive car loan? Then let’s get right into it!
1. Determine Where Your Credit Score Really Stands
If your credit report contains “mistakes”, lenders will consider you high-risk. They may either charge you with higher interest rates or grant you a loan that’s less than what you apply for. Worse, they may not extend credit to you at all.
The thing is, “potentially material errors” on credit reports affect as many as 20% of people in the US. 5% of credit reports even have such serious errors that they affect the person’s ability to get credit!
That’s why the first step on how to apply for an auto loan is to get a copy of your credit report. You can get it for free once a year from any of the three major credit reporting bureaus. You’d only need to give your complete name, address, birth date, and social security info.
Once you have the report, scrutinize it to ensure that everything in it is factual. Even a single mistake that implies you missed a payment on a loan can affect your credit score. This, in turn, can land you in any of the situations we mentioned above.
If you do find inaccurate entries in your report, be sure to dispute these negative items. Only after the reporting bureau has corrected these errors should you apply for an auto loan.
2. Give Your Credit Score a Boost
In the second quarter of 2019, US consumers had an average FICO score of 703. Lenders look at this as a “good” credit score, and anything higher is even better.
The bad news is, the 700 + credit score average applies only to people aged 50 and older. Most people younger than 50 have scores of less than 700. Scores under 670 can either be “fair” or “poor”, either of which can affect your ability to get credit.
If your credit score doesn’t hit the 700 (or even the 670) mark, you may not qualify for an auto loan. Lenders may still extend you credit but in exchange for a much higher interest rate.
So, let’s say that your credit report is accurate and it shows that you have a less-than-stellar score. In this case, it’s best to repair your credit score first before you apply for a car loan. A good starting point is to pay off your credit card debts.
The point is, the fewer debts you have, the more budget you have for car loan payments. As such, lenders may look at you more favorably and respond by giving you a good deal on your car loan.
3. Find Out As Much As You Can About Your Preferred Car
As you’re doing what you can to boost your chances of auto loan approval, do your homework on the car you want to buy. Start by checking the manufacturer’s suggested retail price and its current market value. If you’re thinking of going pre-owned, be sure to use auto appraisal tools to get a grasp of the model’s market value.
This is a key step on how to buy a car as it lets you confirm the model’s affordability and if it can really fit your budget. It also allows you to determine how much you need to borrow from a car loan lender.
4. Time to Compare Your Auto Loan Options
From national banks to local credit unions, these are some of your options when it comes to car loan lenders. All of them, however, charge different interest rates and offer varying loan terms. Even a small 0.5% difference in interest rate can make or break your ability to repay your auto loan.
That said, compare as many car loan offers as you can first to find out which lenders have competitive rates. If you have been a good client of a local bank for years, check if they can finance your car purchase. As a loyal customer, they may grant you a low-interest auto loan.
5. Obtain Pre-Approvals
Once you have a list of potential lenders, you can now apply for loan pre-approval. Pre-approvals are different from “pre-qualifications”. Pre-approvals require “hard” credit checks, while the latter only requires “soft” credit checks.
Now, a soft credit check sounds safer, doesn’t it? Yes, but it will only give you an estimate of the rates you may expect. Meaning, the quoted rate isn’t guaranteed, so you’re still at risk of rate markups.
Whereas pre-approvals give you more specific figures of the rates you may expect. If you meet the rest of the requirements, your interest rate will be as close as possible to the pre-quoted rate.
6. No Room for Hesitation With Negotiations
Go through your pre-approval options and narrow them down even further. It’s best to have at least three lenders on your list of potential financiers.
From here, you can start negotiating with each lender. If you do have the budget, tell them that you’re willing to put a down payment on the car you want to buy. Doing so means you’re serious about buying and it also means that the lender will shell out less for your loan.
A down payment also works on your behalf as it means you’ll take on a smaller amount of loan. This, in turn, translates to reduced interest payments, making your loan more affordable.
7. Send Your Loan Applications In
At this point, all that’s left for you to do is to complete all the requirements of the loan. From here, it’s all just a waiting game to hear back from the lenders. Although some may get back to you in a few hours, others may need a few days.
Follow These Steps on How to Apply for a Car Loan Now
There you have it, all the must-follow steps on how to apply for a car loan and have better chances of approval. Your credit score is one of the most important factors here, so be sure it’s in good condition. Otherwise, you may end up getting disappointed, or worse, having your score go even lower.
If you find errors in your credit report, know that we can help you start the dispute process. Please don’t hesitate to give us a call now so we can help rectify these reporting mistakes.