How to Get A New Car Loan
8 Steps to Finance a New Car
It’s so tempting, when you decide it’s time to get a new car, to go straight to the dealership and just let it all happen right then and there. Resist, please. It really does pay to take a more deliberate approach when you follow these 8 steps. Armed with lending knowledge, and competitive offers, you’ll be all set to negotiate the best financing deal and car price possible.
Step 1: Check Your Credit Rating.
Before you do anything else, check your credit rating. The better your credit, the more you will be able to borrow and the lower your auto loan interest rate will be. Reviewing your credit also helps you discover errors or evidence of fraud so you can file a dispute to correct any issues on your report before you apply for a vehicle loan.
You can get a free copy of your report once a year from any of the major reporting bureaus at annualcreditreport.com . Your report includes info about your payment and credit history — but not your actual credit score. Your credit score is a number ranging from 300 to 850 that looks at your borrowing history to tell lenders how likely you are to repay your vehicle loan.
The lowest rates are awarded to borrowers with the highest scores. Many banks, credit card issuers and credit unions provide free credit scores to their customers/members. Be sure to ask! If you find that your credit score is low (below 600) consider spending 6 to 12 months improving your credit before buying a car.
Lenders evaluate your credit report and credit score, as well as your debt-to-income ratio (DTI) — your monthly debt payments relative to your gross monthly income — your employment history, and other factors. Making payments on time and paying down credit card balances are ways to improve your credit so you can qualify for a better loan.
It Pays To Have A Good Score:
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Step 2: Understand These Lending Basics Before Contacting Lenders.
Before contacting lenders, you should have an idea what type of car you’d like to buy and its cost. You'll also want to understand these lending terms:
- Monthly payment: This is the amount you must pay every month to the lender, by an agreed-upon date, to repay the loan. It includes principal and interest.
- Annual Percentage Rate (APR): The car loan interest rate and any fees your lender charges make up the APR. Comparing APRs can be a good way to assess the affordability of different loans.
- Down Payment: This is the money you put down towards the car’s purchase price: a 20% down payment is a good rule of thumb. The more you can put down, the less you’ll need to borrow and the smaller your monthly payment.
- Loan term: This is the number of months you have to pay back the loan. Common loan terms are 36 months to 72 months, with some loans 84 months and over. The longer the term of the loan, the more you will pay in total interest for the car.
Longer loans are tempting because they reduce the amount you owe each month but could result in an “upside-down" loan, where the amount due on your loan is greater than the car's value. If you plan to keep your car longer than the loan term, this may not matter to you. Otherwise, chose a new car loan that is 60 months or less to avoid an upside-down loan. If this causes your monthly payment to be too high, consider a less expensive car or a larger down payment.
Step 3: Shop Multiple Lenders For Your New Car Loan.
Just as you would comparison shop for the best price on the vehicle you want to buy, it pays to shop lenders to help you secure the best loan deal for the car you want. Every lender evaluates credit history based on their own criteria when determining your auto loan interest rate.
Lending sources for new car loans include:
- Large National Banks
- Local Community Banks and Credit Unions
- Online Lenders
Car buyers shouldn’t automatically rely on dealership financing because it is convenient or the easiest solution when it’s time to buy. Your own bank or credit union may give you a preferred rate, especially if you agree to automatic loan payments from a checking account there. You can also check rates (what link to put here?) from online auto loan lenders. Use all that you learn to negotiate for the best auto loan deal possible.
Step 4: Get Pre-Approved For Your New Car Loan.
Now that you’ve narrowed down your lender options, it’s time to request interest rate quotes and compare offers. When lenders have to compete for your business, this helps you get the best rate. When initiating contact with lenders, they can pre-qualify or pre-approve you for your auto loan. It’s important to know the difference:
- Pre-qualification (Less Binding)
Pre-qualification is a relatively quick “estimate” of the rate and loan amount you could expect to qualify for. These numbers are based on limited information that you provide such as your credit history, your annual income, monthly housing costs, and savings. Note: your pre-qualified rate and loan amount could change considerably once a full credit check is done.
- Pre-approval (More Accurate and Binding )
Pre-approval requires documents such as tax returns, pay stubs, and bank statements as well as a formal credit check. Because you’ve provided the lender with more detailed information, the estimated rate should be closer to the final rate, and you can expect your loan application to be accepted for the amount in your preapproval, or close to it.
Pre-qualifications involve a “soft” inquiry about your credit score, while pre-approvals are a “hard pull” inquiry that will show up on your credit history. The good news is that even if you have several pre-approvals –hard credit inquiries– while auto loan shopping, it will count as just one inquiry on your credit report.
Compare your pre-approval offers to find the offer that best fits your monthly budget, carries the lowest APR, and has the shortest term. Getting pre-approved for an auto loan at a bank, credit union or online lending source essentially makes you a cash buyer at the dealership, giving you more negotiating power and protecting you from marked up rates.
Step 5: Use Your Loan Offer To Set Your Budget.
Your pre-approval offer will state the maximum amount you can borrow. Keep in mind you don’t have to borrow this full amount. If you feel the monthly payment would be pushing your budget, remember that the preapproval offer is just a limit — you can borrow less if you choose. What’s most important is that you make your loan payments comfortably, even if the bank calculates that you can afford more.
An Auto Loan Calculator can help you estimate your loan. You can enter your desired loan amount, down payment, trade-in value of your current vehicle (if applicable) and your pre-approved lending rates/terms to calculate the right monthly payment that fits within your budget.
In addition to the price of your car, you should allow an additional 10% to cover taxes and fees. Every state charges sales tax on vehicles, plus you'll pay a documentation fee to cover registering the car and securing tags for you. Dealerships may also charge a destination fee from the manufacturer.
Step 6: Choose Your Car And Negotiate Your Best Deal.
Now that you’ve got financing offers, and know the maximum car price you can finance, it’s time to shop for your brand, new ride. Let the fun begin!
Once you’ve taken a test drive and found the car you want, it’s time to start negotiating! Be sure to tell the salesperson you’re already preapproved for a loan…which makes you, in essence, a “cash buyer,” so you can haggle for the lowest possible price for the car.
Next up: get the best auto loan offer you can. Because you are already pre-approved, you are definitely sitting in the driver’s seat! You can always choose to go with the best offer from one of the lenders that pre-approved you…OR you can use your pre-approved loan rate to bargain with your dealer to come up with something better.
Step 7: Review And Finalize Your Loan.
Whether you choose dealership financing or financing from your pre-approved lending source…be sure you have the proper documentation on hand, like your driver's license, proof of income, proof of insurance, and proof of residency to finalize your loan…and also your checkbook, if you are making a down payment.
If you do choose to use your pre-approved offer, follow the lender's instructions to complete your loan application and finalize funding. In some situations, you dealer will contact the lender to initiate funding, or you may need to follow up with the lender yourself. The bank will then arrange for the funds or a blank check to be sent to you or the dealership once you have settled on the price of the car.
If the dealership beats your preapproved rate (and the other terms are the same), good for you! Just be sure to read the loan document carefully before signing it. Or ask the dealership’s finance manager specific questions to see if there are hidden fees, add-ons you didn’t ask for, a pre-payment penalty or to check if the loan features a longer term than you realized.
Step 8: Make Your Payments On Time: Pay Automatically!
Making on-time loan payments is vitally important to your credit history and your future ability to secure loans at better rates. Keep in mind: the lender technically owns your car until you fully repay the loan, so they can repossess the vehicle if you miss loan payments.
Consider setting up automatic payments. The funds will be deducted directly from your bank account on a monthly date you choose. You won’t have to worry about meeting the due date or mailing in monthly payments! Some lenders offer a small interest rate discount when you sign up for an automatic payment. Be sure to ask yours if you haven’t received any info about rate discounts. Automated payments can easily be set up with your lender online or over the phone.
Now that you’ve followed this 8-step process, it’s time to drive off into the sunset in your brand-new car, knowing you’ve done your very best to get the most affordable new car loan you could find.