Purchasing your first car is an experience worth celebrating. If you’re ready to take this big step, then pat yourself on the back. Congratulations on your future purchase!
As exciting as it is to begin planning for a new vehicle, it’s important to remember you’ll most likely need to consider a car loan. Car loans are beneficial for several reasons. They’re a great way to supplement what cash you might already have to put towards the purchase of a new vehicle.
When car loan applications are approved, they give the applicant a wider range of affordability when it’s time to make a purchase. Before you start applying to every and any lender, however, you should understand how applying for car loans works. When you enter the process prepared with background information, you can expect to walk in confident and walk out with a great auto loan.
Are you ready to get the process started?
In the guide below, you’ll find plenty of information about qualifying for car loans and how to apply. Continue reading to learn more!
Know Your Budget
Before you apply for your can loan, you should know what your budget is. Take the time to sit down and figure out a good budget for you. Write out all of your expenses and then compare your expenses with your income.
How much money do you have left each month after paying all of your bills? How much of that money are you willing to spend each month for financing your new vehicle? Remember, even if you have $400 left each month after expenses, you don’t want to use the full $400 on car payments.
This would leave you with no money at the end of the month to spend on other necessities or to put in savings. You’ll also want to have enough money each month to put in a savings account specifically for your car. Even new cars will come across trouble at times, and you’ll be thankful to have the money to make the repairs.
Once you determine your budget, you can then begin researching what cars you’re interested in.
Research the Car You Want
Researching the type of car you want is an important step in applying for a car loan. This research is going to give you an idea about how much you can expect to pay for the vehicle. Take your time and look at a few different dealerships online and private sellers as well.
Start comparing vehicle prices. If you’re not finding something in your budget, then consider going down in the year or going up in the miles. Both of these factors will play a part in the price of the vehicle.
Once you find one or two options you’re interested in, print the vehicle information (listing) and bring it with you to your lender. The lender can then look up more information about the vehicle using the VIN (vehicle identification number).
Prepare All Required Documents
Do understand that applying for car loans requires some basic information. Most lenders will require a credit score report, your state identification (driver’s license), proof of income, and sometimes another type of document depending on the situation. If you come with all these documents prepared, you can save time when applying.
Lenders use your credit score to make a decision about the amount and interest of a loan. In some cases, poor credit scores might even prevent applicants from qualifying. Proof of income is also required to ensure you’ll be able to pay the loan back.
You may not qualify for a specific amount of a loan if you don’t make enough money. Keep all of this in mind before applying.
Start Raising Your Credit Score
Did you check your credit score just now in a state of panic? If you have a low credit score or no credit score, then don’t worry. You still have some options.
For starters, you can always begin building your credit back up. To build low credit, start by paying off your high-interest debts first. Do this by putting a few more dollars towards that debt every month than what’s due.
If you don’t have credit, then a good way to build it is to take out a small line of credit. A $500 credit card is a great starting point. Use it each time you put gas in your car and then immediately replace that money.
Keep the use at 30% or lower, and you’ll quickly build your credit. Keep in mind, you also have the option to work with lenders who accept no credit or bad credit applicants. Be sure to do your research before deciding which to choose.
Save For a Down Payment
The more cash you have on hand, the less money you’ll need to get approved for in a loan. There’s no better time than now to start saving for a down payment. Plan to purchase a new car in advance so you have time to put money aside each month in a savings account for your down payment.
If you start putting $300 into a savings account right now, in six months you can have $1,800 saved for a small down payment. Imagine how much you can save if you were to plan a year in advance and put even more into it than $300 a month.
Know the Different Types of Loans
Once you’re ready to visit a lender, it’s best to know about the different types of loans available. In most situations, you’ll have the option of a secured loan or an unsecured loan. Here’s what you need to know about both of them.
Secured Loan
A secured loan usually has a lower interest rate, a longer repayment period, and a larger amount of money. Secured loans are “secured” because the loan is secured by the car itself. If you were unable to make payment, then the lender could repossess the vehicle and sell it to get their money back.
Unsecured Loan
Unsecured loans normally have higher interest rates, shorter repayments periods, and a smaller amount of money. These loans won’t have as many restrictions on the type of vehicle you purchase, however. If you were to stop making payments on the loan, then the lender would have to sue you to get their money back.
Compare Interest Rates
Before you decide on what lender to work with, you’ll want to start comparing loan costs and interest rates. Not all lenders will offer the same interest rate on a loan even with all the same provided documents and similar loan terms. This is why it’s important to shop around.
Some lenders will even offer specials during certain times of the year when they want people to apply for loans. Always do your research and go with a lender who can offer you a great interest rate.
Get Pre-Approved For a Loan
Now it’s time to start the application process. Some lenders will allow you to complete an application online. Other lenders will have you visit them in person.
Either way, be sure to have all those documents mentioned before ready to go. The lender will take all of this information to then determine how much you qualify for, what the interest will be, and how long the loan term is. Remember, with a secured loan, you’ll need to find a vehicle that the lender is willing to lend you money for.
If a vehicle’s priced too high or has a rebuilt title, then the lender might not accept it. If you already have a vehicle in mind, then bring the vehicle information to the lender with you so they can look it up and tell you then and there if they’ll lend you the money for that specific vehicle.
For more details on the approval process, look into taking out a car loan with Plenti for some helpful information.
Bring the Draft to the Dealer
Once pre-approved for a car loan, you can then bring the loan draft to the dealer. Present the draft to the dealer once you’re ready to buy. If the lender specifies to you that they’ll only finance a vehicle for a certain price, then use this as a negotiation tool.
Once the dealer and you agree on a price, you can then present them with the draft and begin the car-buying process!
First-Time Car Buyers Should Understand Car Loan Applications
If you’re a first-time car buyer, then it’s understandable to not know too much about how the car loan application process works. Before you dive into it, however, it’s best to gather as much information as possible to ensure you can meet with your lender and car dealer/seller with confidence.
Use all of this helpful information listed above to get on the right track towards the best car loan applications. For more automobile topics, be sure to check back here on a frequent basis.