How to Qualify for a Car Loan

Nov 21, 2019 | Auto Buying, Borrowing and Credit

Car Buying Options

A car is a big purchase, and you have multiple payment options. You can lease it by making monthly payments but never own the car. You can buy it with cash and not have to worry about making monthly car payments. You can also get an auto loan through a credit union or bank and make monthly payments until you’ve paid off the loan and own the car. If you’re ready to move forward with auto financing, follow these tips to secure an auto loan at the best rate possible.

Check Your Credit

In order to receive a lower interest rate on an auto loan, you must have a good credit score. According to Experian, a good credit score is 700 or above. Your credit score represents how likely you are to repay a loan on time. When you apply for auto financing, the lender will first check your credit score and determine your credit risk.

You can check your credit score and report for free from each of the three credit bureaus once every 12 months. Go to annualcreditreport.com to look at your report, take notice of any errors or fraud and work to fix them. By cleaning up your credit report and knowing your credit score, you’ll will be able to apply for an auto loan and estimate the interest rate.

Maintain an Income

You must show proof of income to qualify for an auto loan. The lender wants to make sure you have money to make your monthly payments on time. Be prepared to show a pay stub or other forms of documentation.

Get Pre-Approved

Dealership financing of your auto loan is always a possibility. But, interest rates may be better if you go to a credit union, bank or online lender first and get pre-approved. Pre-approval means the lender will look at your credit and determine how much you can borrow, the interest rate and the term of the loan. By walking into a dealership already knowing what you can afford, the power is in your hands. You have more clout to negotiate, are able to stay within your budget and can possibly receive a lower interest rate. We have simplified the pre-approval process with our SMART Approval online application.

Do Your Research

The car buying process has dramatically changed over the years. The average car buyer spends weeks and possibly months researching vehicles to find the right color, make/model and equipment as well as financing options. The vast majority of vehicle shoppers, 95 percent, use online resources to do their research before ever stepping foot on the car lot.

Shopping online through our AutoSmart portal might save you thousands of dollars. Dealers usually quote a better price on the internet simply because they are competing with other dealers in a 300 mile radius. If they put too high of a price on the car no one will be interested in it. By knowing the price of the vehicle before you arrive on the lot and being pre-approved, you will eliminate paying too much for the car as well as most of the back and forth between you and the dealership. Also, by knowing the rate you qualify for and the price of the vehicle before you get to the dealership, you already know it fits into your budget.

While you’re researching the type of car you want, don’t forget about the interest rate. You should also shop around and see what multiple lenders are offering. Here are our current rates.

Understand Financing Terms

Before you go through the loan process, familiarize yourself with the financing terms to ensure you understand how the loan functions and what you’re paying for.

  • Annual percentage rate (APR) – the amount you pay to the lender to borrow money including various fees
  • Loan termthe length of time you have to pay off the loan
  • Down paymentthe money you pay up front toward the car price, lowering the amount of the loan
  • Taxes and feesadditional costs rolled into the total price such as state sales tax, documentation fee, etc.

Have a Down Payment or Trade-In Ready

Making a down payment or trading in your current car reduces the amount you have to borrow for a new car and can help you qualify for a lower interest rate.

Down Payment

Giving the dealership a down payment, or a lump sum of money, up front reduces the amount you have to borrow. It may also help you receive better terms including an interest rate. Typically, 20 percent of the car price is considered a good down payment, but a lesser amount is fine.

Trade-In

A trade-in is a vehicle of any value you give the dealership. It acts as credit toward the loan and decreases the amount you have to borrow. It is important that you don’t have a current loan on the vehicle you are trading in as you would have to pay that off first.

Set Your Budget

Your pre-approval shows the maximum amount of money you can borrow for a car, but you must also factor in taxes, fees, registration, license, etc. Now’s the time to make sure you can afford the car you want. Even though you may be approved for a certain amount doesn’t mean you have to use all of that money. Use our loan calculator to determine your monthly payment.

After checking your credit report and credit score and fixing any errors; applying and qualifying for pre-approval; performing research and knowing the price of the vehicle you want; and setting your budget, you are ready to purchase a new or new-to-you car. Car buying can be stressful but taking these tips into consideration can lessen the strain.

When you are ready to move forward with auto financing, we are here to help. Click here or call us at (402) 334-7000 to speak with a service representative.

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