4 Steps To Qualify for a Car Loan
While the process can vary from lender to lender and dealership to dealership, the general gist of getting a car loan is pretty similar.
1. Understand how much car you can afford
First, you’ll want to understand how much car and how much of a car payment you can afford. To help you understand how much you can afford, you’ll want to take a look at your monthly budget. Keeping an honest monthly budget can be the key to planning for additional payments in the future.
If you do not currently have a budget, spend a few months tracking all of the money you make and spend. If you spend all of your money via debit or credit, you can look back on the past few months’ bank statements and track where all of your money has gone.
Next, you can use a car loan calculator and determine how much you can afford.
2. Shop for car loans
Another key factor in how much car you can afford is how much a car loan you can get approved for. This is where it’s helpful to get pre-approved.
To go through this process, first, start by looking at a number of lenders and find the general types of rates available. Keep track of the loans that are available as you shop. Shop around at different types of financial institutions, including banks, credit unions, and online lenders.
3. Apply for the loan
In many cases, you’ll want to apply for pre-approval for car loans. There are many perks to this, including bargaining power and information for budgeting.
Pre-approval is very similar to the normal application process, where you will provide documentation about your financial status, and the financial institution will determine how much you can be approved for.
4. Finalize your loan and purchase a car
Once you’ve found the right loan for you, you’ll want to finalize the loan and purchase your vehicle.
If you are looking for more details about the loan application process, look no further than our comprehensive guide to financing a car.
What Lenders Look for in Your Car Loan Application
When you apply for a car loan, you’ll have to submit certain documentation. This typically includes:
- Proof of identity and residence
- Details about your income
- Credit history
- Employment history
- Information about current debts
- Details about the car you are planning to buy
The lender will then use this information to determine your creditworthiness and how much you should be approved for and at what rate. In general, a lender wants to make sure that when they give you a loan, that you are going to pay back the money.
Your credit report is an important factor in this evaluation. Your credit score can dramatically change the APR (annual percentage rate) you are approved for and change the cost of financing your car significantly. Beyond that, details like your debt-to-income ratio and employment status also help inform a lender about how high-risk you are as a consumer.
Information about the type of car you are buying can also affect your likelihood of being approved. Used cars are more likely to have issues that can compromise their value, and as such, they usually come with slightly higher APR and are riskier to the lender.
How to Make Sure You Qualify for a Car Loan
If you are planning to buy a car in the near future, the best thing you can do is improve your finances and your credit history.
Paying down debt will improve your credit history and debt-to-income ratio. Being responsible with your finances and working to build your credit score is also very important.
Having a better credit score will not only make it more likely that you will be approved for a car loan, but will also help you be approved for lower rates. This saves you money both monthly and over the life of the car loan.
Heading to your local credit union can also help you qualify. These financial institutions are equipped to help their members achieve the financing they need.
Ready to Start Shopping for Car Loans?
If you’re ready to start shopping for car loans, you may want to consider going through the process of getting pre-approved. As we mentioned above, pre-approval brings with it lots of benefits.
We’ve detailed all of those benefits – click below!
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