Preparing to Apply for a Car Loan
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So, you’ve been mulling how to pay for a car you have your eye on, and you’ve decided to try to get a loan. Well, to save yourself time, money, and potential frustration, there are some things you can do before applying. In the name of constructive preparation, here they are.
Establish a Budget
What you’re ultimately doing here is determining how much vehicle you can afford. You can use a loan calculator to play with possible amounts and interest rates to come up with a workable monthly payment. This will give you a point of reference you could use when shopping for lenders.
Also, focusing on your monthly payment could cause you to overlook your term and commensurate interest rate. A better approach might be to home in on the vehicle’s overall cost (final price, including the number of payments and the interest you’ll be paying) plus the cost of vehicle upkeep. It’s widely recommended that you keep vehicle-related expenses at or under 20 percent of your net pay.
Check Your Credit Reports
Now is the time to see what your prospective lenders will see when you apply for a car loan. The first thing you should look for are any errors that could be holding your scores back. Have those corrected, as they could make the difference in terms of getting the rate you want.
If your credit scores are on the lower side, and you have time, consider putting off your car purchase until your scoring is such that you can get a better rate and payment. If you already have good credit, you can use it as leverage in the negotiating process.
In addition, you might want to check your debt-to-income ratio, which compares your monthly obligations to your income. A lower one might help you gain a more competitive rate.
Pull Together Documents
While every lender is different, they all will generally want the same personal and financial data, in addition to information on the vehicle in which you’re interested.
First off, you’ll need basic info including your Social Security and driver’s license numbers, plus proof of address, such as a mortgage statement, lease agreement, bank statement, or utility bill. The lender will also need to know how much you earn, which you can show with paystubs. Also have employer contact information ready.
While info on the vehicle you wish to buy is also helpful, it’s not crucial since the lender, through the preapproval process, permits as many as 30 days to shop for a ride.
Explore Your Options
Take however much time you can spare to shop around. In addition to traditional lenders, your possible options include credit unions and online lenders, as well as dealership financing.
You’ll want to try to get the best rate, making sure to inquire about extra costs such as penalties or fees.
Get Preapproved
Getting preapproved for a loan can put you in the driver seat, figuratively and literally, starting with negotiations. Doing so can let you know what kind of rates and terms you can expect with specific lenders. All you need is the desired amount you want to pay for the vehicle, and the term you want. Make sure your rate shopping doesn’t exceed two weeks at a time, though, to avoid damage to your credit score.
If you’re preapproved for a loan, you’ll likely get a preapproval letter from the lender to take with you when you go car hunting for use as a bargaining chip during negotiations.
Applying for a car loan will likely never rank as among the world’s most desirable experiences. However, if you take the above actions, the ultimate outcome will likely have been well worth the effort.
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