If you want to get approved for car financing, don’t just wander into a car dealership to find the car you want; be prepared and put yourself in the best position to get a good loan — or to refinance the car loan you have.
When you’re applying for an auto loan, you can help a lender make a decision that’s favorable to you by bringing the right documentation with you and understanding how your credit history affects the interest rate you’ll be offered. Here’s what you need to get a car loan.
1. Proof of Income
Most lenders require proof that a borrower is actively earning income. The easiest way to satisfy this requirement is to bring a pay stub that’s less than a month old and shows your year-to-date income.
If you’re self-employed, you’ll need tax returns and bank statements. Generally, lenders require two years of tax history but might ask for as many as five; you’ll also need bank statements from the past three months. In addition, you might increase your borrowing power by showing proof of supplemental income, such as rental income from an investment property.
2. Proof of Residence
A lender must verify your address on the loan application. You have several options to prove that you live there: You can bring a utility bill or any other business correspondence that you receive at your current address. You’ll also need to provide a valid driver’s license if you plan to drive away with a car.
3. Proof of Insurance
State laws require that all cars on the road be insured, so the lender has to know that you have adequate coverage before he can give you a car loan. If you have already purchased insurance, bring documentation.
If you don’t have coverage, you’ll probably be able to call an insurance company from the dealership and secure it. Keep in mind, however, that financing through the dealer won’t enable you to shop around for the best policy rates from other lenders. If you have a good relationship with your bank, for example, you might be able to get a better car loan rate with a preapproved car loan than you would through the dealership.
4. Credit and Financial History
Lenders are concerned with your current and past finances, including your current debt-to-income ratio — or the percentage of your monthly gross income that goes toward paying debts — as well as your credit history and credit score.
You won’t need to bring anything — the lender can access this information with your basic personal information and your consent. Just be aware that the lender will analyze your current and past debt history.
5. Vehicle Information
If you’re applying for a used car loan, you’ll need a lot of information about the vehicle you’re buying. The lender will want to document the vehicle’s purchase price, identification number, year, make and model, mileage, original title, and any liens that might be on it.
The dealer is usually bound by the “used car rule” to provide you with a comprehensive buyer’s guide for the car you’re buying. That guide contains the information you’ll need to apply for a car loan, plus facts about your rights and responsibilities.
You should thoroughly review that guide and understand everything before you sign on the dotted line. If you’re trading in a car as part of the deal, bring all the relevant information for that vehicle, too.
How to Get Approved for a Car Loan
You can increase your chances of getting approved for a loan as well as getting a good rate. Lenders will check your credit during the approval process, which means you should, too. Pull your credit report from all three agencies — it’s free once a year and it won’t affect your credit score — to find out what’s in your report.
If you find any incorrect information, follow each bureau’s instructions on how to dispute credit report errors and remove old accounts and errors in personal data. Also, consider consolidating multiple credit cards and paying off as much debt as possible. Finally, close a few credit card accounts if you have a lot of revolving debt, but keep your older accounts open — credit age affects your score.
Whether you’re financing a used or new car, you’re asking a lender to take on a risk. Set the lender’s mind — and the underwriter’s — at ease by bringing essential items, having critical information ready, and putting in the time and effort to make yourself a more attractive borrower.