Here at Your Family Finances, we strongly recommend that you not get a loan to buy any depreciating assets (and that includes a car)! Instead, pay yourself, and sock away money until you can buy a car for all cash. In the meantime that may mean driving a “beater”. But you will definitely come out ahead in the long run.
But If You Must Get a Loan to Buy a Car
One of the first things you’ll need to do if you’re looking for a car loan is to figure out what kind of loan you qualify for. Getting a loan can be a tricky process since lenders will consider many factors when deciding. You can, however, increase your chances of getting approved for a loan by following a few simple steps.
What Lenders Review Before Approving a Loan
Credit Score
You’re more likely to qualify for a loan with a lower interest rate and better terms if you have a good credit score. You can still borrow money even if you have a poor credit score. You will, however, have to pay a higher interest rate. The highest rates are reserved for those unfortunate enough to have to buy from a car dealer that says they loan to everyone. These loans are reserved for those without a better option. If you must resort to this type of loan you could end up paying double the sticker price of the car by the time you include interest and fees.
Steady Income
If you are applying for any other type of loan, your income is a key factor. The lender will want to see that you have a steady source of income from an employer, self-employment, retirement benefits, or other sources before they approve your loan. Creditors will consider several factors when determining whether to approve or deny a loan. The borrower’s income indicates their ability to pay back their debt.
Debt-to-Income Ratio
You need to prove that you are not overextended on your debts and that you will be able to make your loan payments on time. The higher the debt-to-income ratio, the harder it is to get a loan, so keep this ratio as low as possible.
How to Find a Lender
There are a few things to keep in mind when searching for an auto loan lender. First, find lenders that offer pre-approval. They will tell you how much you can borrow and what interest rate you’ll qualify for before you apply. Generally, Credit Unions offer the best rates, then Banks, and finally car dealers.
Next, you’ll want to check APRs (annual percentage rates). This method of comparing interest rates is the most accurate since it takes any fees that the lender may impose into account. Interest rates vary from lender to lender, whether they are a bank, credit union, or dealership. Many banks and dealers offer a Loan Calculator like the one provided by On-Trac Auto Sales, that can give you an idea of how much the loan is going to cost you.
Your income, credit history, and debt ratio will all play a part in what you can afford to borrow. You should also pay close attention to the fine print. In some cases, lenders may offer teaser rates that go up after a certain time. Other lenders may charge prepayment penalties if you pay off your loan early. And finally, be willing to negotiate. If you are getting a loan, you should try to get the lowest rate you can. A little negotiation can go a long way.
Conclusion
By learning what lenders look for as well as how to find a lender who is flexible and willing to listen to your point of view, you can give yourself the most likely chance of getting approved for the car loan you need.
You might also like:
- How to Financially Prepare Your Teenager For Buying Their First Car
- Ways You Can Make the Expenses of a Family Car Better Fit Your Budget
- Buying Your First Car? Here Are Some Tips
- Steps You Can Take Now to Start Searching for Your Next Vehicle
- Car Hunting on a Budget
- Buying a New Car? How Your Credit Score Can Affect Your Purchase
- Negotiating a Good Deal on a New Car
