There are two options available to you when you’re looking for a car loan: dealer financing, outside financing, or financing through a credit union, bank, or online lender.
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Degen says, “At Kelley Blue Book we recommend getting preapproved from your bank/credit union to give yourself options.” Preapproval gives you the opportunity to walk in the dealership and prove that you are serious buyers. The dealership will also be able to match your offer.
However, outside financing will always offer better deals. There are many reasons to obtain dealer financing. Many of those are tied to incentives. Degen says that you should compare the offers from multiple lenders in order to find the best deal.
You may be unable to obtain a traditional auto loan approval. Consider getting a cosigner with good credit and steady income. The co-signer will share the responsibility for the debt and could increase your chances of getting approved for a car loan. Be aware, however, that cosigning for a loan can pose risks to both the borrower and the cosigner.
Auto Loan vs. Personal Loan
A personal loan, unlike auto loans which are secured loans that are specifically for car purchases, is an unsecured loan that can also be used for other purposes, including purchasing a vehicle.
Personal loans have higher interest rates than car loan because the debt is not secured and therefore more risky. If the loan amount is small or your car is not eligible, an auto loan will likely work better than a personal loan.
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How to apply for a car loan
Your credit score and credit report are important. “Better credit means better terms for your financing,” says Degen. Degen says that if you don’t have good credit, you will likely pay a higher interest rate. He says that if you can take the time to improve your credit score before purchasing a car, it is always a good idea. You can check your credit report for free at AnnualCreditReport.com. Although there is no official way to access your credit score, credit card companies and banks will often provide information about customers’ credit scores.
You can shop around for direct lenders to finance your loan. You may be eligible for special discounts or other incentives if you are a customer of your bank. Online auto loan lenders may offer better deals than brick and mortar institutions.
Pre-qualify for a loan. Get pre-qualified by narrowing down your options. Online tools are available from many lenders that let you view loan offers and make payments without having to do a credit check. This allows you to check your rate without risking your credit score. If you are self-employed, it is a good idea also to get your most recent pay slips and tax returns. These documents will be required by the lender at one point during the application process.
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Do the math. To determine the amount of car you can afford, review your monthly budget. Other than the car payment, consider other costs such as fuel and repairs, insurance, and renewal fees.
Start car shopping. Once you have a pre-approval, you can start your search for the right vehicle to meet your needs and budget. Only shop for cars that are in compliance with the lender’s requirements and eligible for financing. Don’t get too focused on the monthly payments and tell the dealer your budget. While it’s tempting to focus solely on the monthly payment, you should consider the total cost of the loan. Then you can determine the terms that work best for you. Degen suggests that you know your personal comfort level and how much you are willing to spend.
Compare the loan options. You should be able to compare the options of different lenders if you have done your research. Choose the one that suits you best. Sellers recommends that you compare the offers, including the amount of the loan, the term, the down payment and any incentives or discounts.
Choose the best deal and close your loan. Send any additional documents or information the lender requires, and then sign the closing documents.
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If you don’t have car insurance, get it. You must show proof of your auto insurance before you can drive your car off the parking lot. You can request documentation from your insurance company if you have an existing policy. To get the best rate for your new vehicle, make sure you shop with several insurance companies.
