Did you know that the average monthly payment is $667 for a new vehicle? For used vehicles, the monthly payment is about $515 on average.
Whether you’re buying a car new or used, it’s important to understand how to apply for vehicle finance options. Have you considered financing your car but don’t know how to get started?
The following guide will explain how to apply for financing and the different options available. Read on to discover how to finance your vehicle and what kind is correct for you.
Table of Contents
Check Your Credit
Before applying for financing, you must first check your current credit score. Your score combined with your annual income determines how much money you can borrow and your interest rate.
Check for any errors, fraudulent activity, or wrong information on the credit report. If you find any of those things present, you might get rejected for a loan or only offered an extremely high-interest rate.
If you have a credit score of 600 or less and don’t need a vehicle right away, consider waiting 6 to 12 months to improve your credit. Make your payments on time and try to lower your balance to improve your score and get approved for a better loan.
Keep in mind that your credit history is just as important as your current scores. So, if you’ve paid off a past vehicle purchase successfully, it helps your chances for loan approval with reasonable rates.
Lenders such as Ally work well for mid-level credit scores. You can learn more about Ally auto finance to get a better idea of lender requirements.
You’ll also need to meet income requirements even if your credit is great. Most lenders also make sure you have a stable work history as well before approving loans.
After getting your credit in order, apply for your car loan with multiple lenders to find the best deal. Dealership financing is a very common option, but it’s good to shop around and compare prices.
Apply at big national banks like Bank of America or Wells Fargo and then at a few community banks or credit unions. You can even check online for auto lenders that issue loans.
Note that your own bank or credit union might offer you a preferred rate that’s better than the dealerships offer. Agreeing to automatic payments directly from your checking account also helps get better rates from your bank.
You might prefer to buy your vehicle from a private party rather than a dealership. If so, check with each lender you plan to apply with to make sure they allow it.
What Are Pre-qualification and Pre-approval?
Pre-qualification delivers a rate estimate and loan total you might qualify for. It’s based on a small amount of information about your credit history that the lender has.
It only takes a “soft” credit check to obtain pre-qualification and it won’t affect your credit score. Just keep in mind that the estimated rate you receive might change significantly after a full credit check.
Preapproval is different from pre-qualification and a step above. It demands a “hard” credit check that lowers your credit score temporarily. The benefit of pre-approval is a more accurate estimated rate because the lender has more credit history information.
Getting preapproved for a car loan gives you more negotiating leverage if you’re ready to buy from a dealership. It also helps shield you from marked-up rates.
Create Your Budget
Getting preapproval offers lets you know the highest amount of money you can borrow. However, that doesn’t mean the price of your new vehicle should match that price.
Make sure to account for an extra 10% to pay for taxes and other fees. Consider using an auto loan calculator to create your loan plan. Add things like your down payment, the trade-in value of your current car, and relevant terms from the lender.
You might find that your preapproval payment is too high for your budget. Remember, can choose to borrow considerably less money to help you make comfortable monthly payments.
Selecting a Vehicle
Once you know how much financing you have, you can start searching for your new vehicle. Just make sure to evaluate any restrictions that different lenders might have.
Lenders can deny funding for specific car manufacturers or vehicle types. For example, some lenders won’t approve funding for electric vehicles.
Some lenders only approve financing for purchases from certain dealerships in their network. You also need to make sure you know how long their loan offer last. Typically, you have 30 days to find a car and use the loan or you’ll need an extension.
Choosing a Loan
Sometimes dealerships offer a better rate than your preapproved rate. In this case, you’ll know you have an excellent rate and ignore any other offers.
However, it’s good to read the fine print and check for hidden fees even with a good rate. remember that you will need to pay sales tax, a documentation fee, and costs for registration. You should question any additional fees outside of those 3 fees.
Keep in mind that a longer loan term might cost you a lot of extra money in the long run even with a low rate. Also, make sure the dealership doesn’t add any extras without your approval such as gap insurance.
Some lenders charge a penalty if you pay off your loan early. It’s not a common practice in car lending contracts but you should double-check for it just in case.
Some dealerships start funding with the lender on their own without you needing to do anything. However, some lenders require you to contact them directly to initiate funding.
Understanding Vehicle Finance Options
Now you know the steps required for different vehicle finance options. Remember to get your credit on track before applying and that pre-qualification estimates might change. Compare multiple lenders for the best deal and buy your new vehicle with confidence!
Check out our site’s personal finance section for more money-saving and budgeting tips.