If you’re looking to buy a new vehicle, expect to see an average sticker price of over $40,000. That’s how expensive new light vehicles are, so it’s no wonder buyers had to borrow over $35,000 to take one of them home.
If you need access to new wheels but can’t afford to shell out 40 grand on the spot, consider taking out a car loan. An auto loan can be a good deal if you want to own the car instead of “borrowing” it on a lease.
However, applying for auto loans can take weeks or even months of preparation. Most of this would go toward polishing your credit score, especially if it’s a “subprime” score.
Don’t worry, though, as we’re here to give you a detailed explanation of what you need to get a car loan. Read on to discover the common requirements and what you can do to boost your odds of getting a yes from a lender.
An Error-Free Credit Report
Your credit report documents your previous and current credit activity. It contains information about your past and outstanding debts and if you pay them on time. It’s a reflection of your creditworthiness, based on lending institution standards.
Unfortunately, one in five consumer credit reports have errors in them. If yours is one of these, they can lower your credit score, which in turn, makes you look bad in the eyes of car loan lenders. A low credit score can lead to a higher car loan interest rate, or worse, a denied loan application.
The good news is that you can get a free copy of your report from each of the three major credit bureaus once a year. Do this a few weeks or even months before you apply for a car loan. This way, you have enough time to file disputes in case your report contains errors.
A Good Credit Score
Suppose your credit report is error-free and that you’re part of the 30.9% of consumers with a subprime score. You should prioritize raising your credit score first before applying for a car loan. While you can apply for bad credit car loans, these cost way more than traditional auto loans.
If you only need to boost your score by a few points, you can do so in just a few weeks. Still, your goal should be to pull it up to at least 661 to qualify for below 5% interest rates. Depending on how “behind” you are on points, it can take weeks, months, or years to raise your score.
In any case, you can improve your chance of getting approved for a low-rate loan if you pay down credit card debts. In doing so, you can lower your credit utilization rate, which makes up 30% of your credit score. A low credit utilization rate indicates a lower likelihood of missing loan payments.
Paying off debts also updates your payment history, which makes up 35% of your credit score. By making on-time repayments, you can show lenders that you’re a responsible borrower.
Proof of Income
A stable income source is crucial to car lenders as it indicates that you can repay your loan. For this reason, lenders usually require proof of employment, such as a W-2 form or a recent pay stub. Self-employed borrowers may have to submit bank statements.
Proof of Identity and Residence
Auto lenders require government-issued identification cards from borrowers. A state-issued driver’s license or Social Security card is often good enough for them. However, you may also want to prepare your passport to serve as a back-up.
A lender may also accept your driver’s license or Social Security card as proof of your residence. If not, you can always furnish them with a recent utility bill. They may also accept financial statements with your address indicated on the documents.
Lenders need proof of residence as this lets them know where they can find the financed vehicle. They need to know this in case they have to repossess the vehicle due to car loan payment defaults.
Information on the Vehicle You Want to Finance
If a dealership finances your car purchase, they should take care of this. However, if you’re applying with a direct lender, you need to give them information on the car you want to buy. This includes the vehicle’s purchase price, year, make, and model.
In some cases, lenders may require the vehicle identification number (VIN). The VIN is a string of 17 characters that identify individual vehicles. Each operational or registered vehicle has a unique VIN.
If you’re financing a used vehicle, you must supply the same info plus the car’s current mileage. Lenders will also require you to provide any disclosure form issued by the seller. This is especially important if the used car still has a lien on it.
The Amount You Need to Borrow
Just because you want to buy a $40,000 vehicle doesn’t mean you should borrow all that money. Always keep in mind that the more you borrow, the greater your interest payments.
Moreover, the higher your loan amount, the bigger your monthly loan repayment. You can lower your monthly payments with a longer loan term, but this can also mean higher interest rates.
For this reason, you should consider making a down payment so that you’d need to borrow less. For example, you can put a down of $10,000 using some of your savings so that you only need to borrow $30,000 instead of $40,000. In doing so, the lender would only apply the interest rate on a $30,000 loan.
Trading in your current vehicle can also help trim your new auto loan costs. You can then deduct the vehicle’s trade-in value from the amount you need to borrow. So, if your current ride has a trade-in value of $10,000, you would need to borrow $10,000 less to finance the new vehicle.
Follow This Guide to Snag a Good Deal on a Car Loan
Your credit score is one of, if not the most important thing you need to qualify for a car loan. The higher it is, the better offers you can get, and the lower your overall auto loan costs can be. That’s why it pays to boost your credit score first before you start shopping around for a lender.
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