If you’re shopping for a car, you’ll probably also need a car loan.
Getting a loan for your new or used car can seem daunting, but it’s not difficult. Follow these eight steps to ensure you get the best finance deal for your future car.
Financing can be arranged either by yourself or through a dealership. While dealer financing may be the easiest way to get your car financed, it’s not always the cheapest. Be sure to shop around with other lenders to find out what interest rates you qualify for based on your credit and financial situation.
1. Check your credit
Your first step should be to check your credit report and
. Your credit score is a number on a scale from 300 to 850 that looks at your borrowing history to tell lenders how likely you are to repay what you borrow.
If you need access to your credit report, you can get it for free from any of the three major credit bureaus at annualcreditreport.com each week until April 20, 2022. This report will give you information on your payment and credit history – although it will not provide you with your credit score. Reviewing your credit report can help you spot errors and find areas for improvement.
You can get your score for free on your credit card statement or online account. You can also buy it from a credit reporting agency.
Your credit score will have a big impact on your loan interest rate. There is no minimum credit score required to buy a car, but the best rates go to borrowers with a credit score above 660. Knowing your credit score in advance can help you tailor your search lender to your specific situation and to avoid any surprises when you start shopping. .
2. Determine how much to borrow and what you can afford
You need to know what type of car you are planning to buy when looking for your loan. You will also want to consider the following factors:
- The monthly payment. How much can you afford to pay each month?
- How much you can deposit. The rule of thumb is a 20% down payment on a car. The more money you can put up front, the smaller the monthly payment will be.
- How long of a loan you will need. Longer loans can reduce the amount you owe each month, but they could cause you to be “upside down” on your loan, a situation where the amount owed on your loan is more than the value of the car. Cars are notorious for depreciating or losing significant value over time. Choose a loan of 60 months or less to avoid an upside down loan. If your loan is too long, consider choosing a cheaper car, making a larger down payment, or paying more each month.
3. Choose a few lenders you like
Once you know how much you can afford and your credit score, start looking for a lender. Some options include:
4. Get pre-approved from these lenders
Once you’ve decided on a few lenders, start asking for pre-approvals. A pre-approval is a bank’s way of saying conditionally that it is willing to lend to you. You can be pre-approved by as many lenders as you want. You may want to check with a few lenders to compare the interest rates they offer.
Dealerships can also help you arrange financing, but it’s worth shopping around in advance. It is common for dealerships to mark up finance rates. Therefore, consulting different lenders could help you ensure that the dealership’s offer is the best deal.
5. Compare your pre-approval offers
Once you start getting pre-approvals, you’ll have 14 days to gather as many as you want without multiple serious credit inquiries showing up on your credit report – they’ll all show up as one. A thorough investigation gives the lender a full view of your credit history, but can negatively affect your credit score.
Pre-approvals are usually good for 30 or 60 days, depending on the lender. Compare your pre-approval offers to find the one that best fits your monthly budget, has the lowest APR and the shortest term.
6. Accept an offer
You will now accept the loan offer that suits you. Make sure you have the proper documents on hand, such as your driver’s license, proof of income, proof of insurance, and proof of residency, depending on the lender. You will also want to bring pre-approval documents and your checkbook if you are doing a
. The bank will then arrange to send the funds or a blank check to you or the dealership, and you are ready to buy the car.
7. Meet at the dealership
This is the fun part: choose the car. Then you will sign papers at the dealership. Often the lender you choose will send you a blank check and you will complete it once you and the dealer have agreed on a price. You will also make your deposit at this stage.
Once you have left the lot, the lender will send you information about how much you owe and how to pay.
8. Automate your payments
Many lenders offer a small discount on interest rates when you sign up for autopay. When you set up automatic payments, funds will automatically be deducted from your bank accounts on a monthly date you choose.
Autopay can be set up through your lender online or over the phone. Many lenders will notify you of rate reductions before and as you apply on their websites, or via documents sent to you after your loan is finalized.
Buying a car is a big decision, but you can ensure you get the best deal possible by shopping around and prequalifying with different lenders.