10 Things To Do Before Applying for a Car Loan
Written by
Laura Beck
Edited by
Ashleigh Ray
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Purchasing a car is a significant financial decision, and securing the right loan can make a substantial difference in your overall costs. Before you apply for a car loan, it’s essential to take proactive steps to ensure a smooth and favorable process.
Here are 10 things to consider before applying for a car loan, according to lending experts.
Understand Loan Qualifications
Adam Crossan, head of auto at LendingClub, emphasized the importance of knowing what you need to qualify for a car loan.
“It’s important to start with knowing what you need to qualify for a car loan,” he said. “Qualifications can vary depending on the lender and the vehicle you’re buying. In general, having good credit, a low debt-to-income ratio, and a low loan-to-value ratio can increase your chances of getting approved.”
Assess Your Budget
“You’ll want to look at your budget to see how much you have available to spend for auto expenses each month,” said Gary Guthridge, AVP of consumer lending at Navy Federal Credit Union. “The biggest auto expense will likely be your monthly payment, but you should also consider insurance costs along with the cost of routine maintenance and repairs.”
Improve Your Credit Score
Heim Levi, managing director of Auto Almanac, emphasizes the importance of credit score: “Taking the time to check and improve your credit score can significantly impact the loan terms and interest rates you qualify for, potentially saving you money in the long run.”
Explore Your Options
Guthridge recommends utilizing online resources like auto loan calculators to understand how factors such as loan length, interest rate and down payment affect your monthly payment.
“With the internet at your disposal,” he said, “you have access to resources where you can play around with the numbers to see how all of these aspects affect your monthly payment.”
Research Lenders
“The rate and loan terms that you get could vary depending on where you apply for your loan,” Guthridge said. “For instance, credit unions often have lower rates than other financial institutions, so you may want to see if you are eligible for membership at a credit union near you.”
Consider Pre-Approval
Guthridge suggested considering a pre-approved loan, which can provide peace of mind and strengthen your negotiating position.
He said, “Having a pre-approval in your hand lets you show the dealership that you are a serious buyer who has done their research and has already been able to secure proof of financing.”
Prepare Documentation
Levi recommended being prepared with necessary documentation, such as proof of income, employment verification, and identification.
“This can expedite the application process and increase your chances of approval,” he said.
Consider New vs. Used
Crossan said buyers should be aware of the potential differences in financing between new and used cars.
“Buying a used car vs. a new car will affect financing,” he said. “Some lenders will only finance a new vehicle and/or charge higher interest rates on new vs. used cars.”
Look for Prepayment Options
Crossan suggested considering prepayment options when selecting a lender.
“Some lenders might also charge a fee if you want to pay off your auto loan early,” he said. “If the loan doesn’t have a prepayment fee or penalty, you may save money refinancing the loan from a lender like LendingClub or paying it off early.”
Save for a Bigger Down Payment
As a final tip, Crossan recommended, “Looking for a less-expensive vehicle and saving for a bigger down payment could help in the long run.”
By following these expert tips, you can navigate the car loan application process with confidence and secure a financing option that aligns with your needs and financial goals.
As Levi said, “Being prepared before applying for a car loan can help buyers secure a favorable financing option, reducing the overall cost of ownership and ensuring a stress-free car buying experience.”
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