If you’re planning to buy a vehicle, the odds are you’ll be doing so with help from a car loan – since more than half of all cars are bought this way. With interest rates so low right now, such borrowing is especially appealing.
A lot of car buyers start their shopping by selecting the car they want, and then initiate steps to finance it. That’s not the best order of play, according to car-buying experts. If you research (and even secure) your loan first, rather than your vehicle, you’ll be better informed about how much you can afford to spend before you begin to kick tires and take test drives.
Used-car buyers can buy a vehicle with a car loan, but only if it’s from a car dealer franchised by a major car manufacturer. The only financing option for a private-sale used car purchase is a personal loan – which will have a higher interest rate than a car loan.
This guide runs down the steps to get a car loan, including the best ways to shop for the loan and how to narrow down your choice of lenders.
Verifying your credit score allows you to start shopping for a car loan armed with the best idea of whether you’ll be approved for a loan and if you are, the amount, interest rate, and loan term you might receive. The better your score, the better those terms if you take out a loan. (Our advice is mostly aimed at those with solid credit scores. If you have poor credit, see the section at the end of this guide.)
Checking your score has other benefits, apart from preparing to get a car loan. It also allows you to validate the information in your credit reports, and to ensure that no errors or other issues are unfairly hurting your credit history or lowering your credit score. The good news is that you get to see, for free, what’s on your credit rap sheet. You can view one free report per bureau per year by going to and filling out a form.
Your credit score isn’t the only factor lenders consider during the application process, according to Experian, one of the credit bureaus that generates those scores. They’ll also look at your credit report, your debt-to-income ratio (DTI) – your monthly debt payments relative to your gross monthly income – your employment history, and other factors. But a score that’s at least good – defined as 670 or more by http://paydayloanstennessee.com/cities/humboldt FICO – makes it more likely you’ll be approved for a car loan, and at the best terms. If it’s in the fair range, Experian says, you’ll likely qualify as well, though you may have to settle for an offer that carries higher interest charges or fees or requires a relatively high down payment.
Step 2 for Getting a Car Loan: Shop Around
You’ll invariably be pitched a car loan by the dealership, assuming that’s where you buy the car. Dealer loans on new cars are often subsidized by the manufacturer, and so can be a good option for many who have good credit, according to Consumer Reports.
But car buyers shouldn’t make the dealer the only place they shop for a loan. You may find better terms elsewhere, or gain insights from your research that better arms you to negotiate with the dealer over the car’s cost and the terms of its financing. Your bank or credit union is another easy shopping option, especially if you already have a beneficial personal relationship there. If you’re not a credit union member, consider joining one (using this federal site), since car loans from these institutions may offer lower rates and fees than banks. You can also pitch your car-loan business to online lenders, which may also offer better rates than your bank. Sites such as Clearlane (operated by Ally Bank), E-Loan, and LendingTree allow you to gather multiple loan quotes with a single application.