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How easy is it to get a car loan?
Unfortunately, there’s no clear-cut answer, as myriad different factors affect the attainability of car loans. However, you can get a pretty good sense of whether or not you’ll be able to obtain car loan financing by keeping these key considerations in mind:
- Credit standing: Auto loan lenders will most likely pull your FICO Score to determine how fiscally responsible you are. A FICO Score above 720 is considered excellent, 660-719 is good, and anything below 660 might make it difficult to get a car loan.
- State of the economy: This gives lenders an idea of how likely you are to experience financial hardship (e.g. job loss) or prosperity (e.g. salary increase or promotion) during your car loan’s term. If you are a borderline candidate for a loan, the economy’s trajectory could be the difference between getting financing and not getting financing.
- Down payment: How much you’re willing to put down in cash informs lenders how vested you are in not defaulting on a loan. The more money you put down, the higher your chances of garnering approval.
- Disposable income: The extent to which your monthly take home is already spoken for as a result of existing expenses indicates to issuers your ability to take on additional debt. If a new auto loan will deplete your disposable income, you’re unlikely to garner approval, no matter how good your FICO score is.
How do I go about getting a car loan?
Consumers often don’t know where to start when buying a car. Should you first find the car you’d like to buy, or do you begin by securing financing? Can you get pre-approved? Where’s the best place to get a car loan? The process can admittedly be confusing, and the cost of a vehicle purchase necessitates getting it right, so here are the basics steps to take when buying a car:
- Determine how much to spend: In doing so, you must identify both the down payment you can afford to make and how much you want to borrow. A car loan calculator will help you in this regard.
- Compare auto loan rates: Once you know how much you’re looking to borrow, you can compare car loans in order to find the best deal
- Submit your car loan application: If you’re buying through a dealership, you won’t yet need the specifics about the car you’re using the loan for at this stage. The rate and amount for which you’re approved will be locked for a period of around 30 days, during which time you can tackle Step 4. If, however, you’re buying a car from a private seller, you’ll need to address Step 4 before submitting an application for a loan.
- Shop for your car: This not only entails browsing car listings online and visiting dealerships, but also negotiating to try to get a better deal than is advertised.
- Give the dealer a chance to offer better loan terms: With auto loan financing already in hand, it’s worth a shot to see what the dealer can bring to the table. The beauty of doing this after the car’s price is finalized is that the dealer can’t try to sneakily offer you a better loan at the expense of a higher sale price.
- Notify your lender: If you decide to go with the original auto loan you were offered, notify the bank or credit union that you have selected the car whose purchase they’ll be funding and complete the transaction.
What information do I need to apply for a car loan?
When applying for a car loan, you will usually need at least the following information, though certain lenders may require more:
- Name, address, e-mail address, phone number, and work status (plus those of any co-applicants
- Driver’s License Number (DLN) and Social Security Number (SSN) (plus those of any co-applicants
- Type of purchase (i.e. a dealer purchase, a private-party purchase, a refinance, or a lease buyout).
- Amount you wish to borrow and desired repayment term (e.g. 24 months, 36 months, or 48 months
- Year, make, model, mileage, and vehicle identification number (only required for private party purchases, refinances, and lease buyouts)
Is a car loan a secured loan?
Yes, a car loan is secured by the very value of the vehicle it is used to purchase. In other words, your car will act as collateral for your loan and could be repossessed if you don’t make payments as agreed. This, of course, means that your lender owns the title of your car until you’ve paid back your loan in full.
An interesting strategy to explore toward the end of your loan is transferring what remains of it to a 0% balance transfer credit card
. Certain credit card companies allow the transfer of non-credit card debt, which will not only get you the title to your car faster, but also remove the threat of repossession and provide a significant period of time in which to pay down your principal interest-free.
Do car loans build credit?
Yes. Car loans are listed on your major credit reports (i.e. TransUnion, Equifax, and Experian), and credit scores are based on the information contained within them. Therefore, on-time payments will add positive information to your credit reports and help improve your credit standing, while missed payments will result in your reports filling with negative information and your credit score falling.
Are auto loans the same for new and used cars?
There are no fundamental differences between new car loans and used car loans, but that’s not to say they’re exactly the same. Used car loans tend to have higher interest rates than new car loans because the vehicles that act as their collateral are worth less and therefore don’t provide the same financial protection to lenders. In other words, when lenders repossess new cars, they can sell them quickly and recoup their money. There’s less consumer demand for used cars, however, which forces lenders to sell them at marked-down prices upon repossession.
How long should my car loan term be?
In general, your car loan should be as short as possible while still being affordable. The reasons why are simple: 1) The longer you revolve debt, the more interest you will have to pay on the principal; and 2) You don’t want to stretch yourself so thin that an unexpected expense or two will result in you falling behind on payments. Don’t get fooled either; longer loan terms might seem more attractive given that your monthly payments would be lower, but they’ll still end up costing you more in the long run. For example, a 24-month car loan is roughly twice as expensive as a 48-month car loan, with everything else remaining equal.
In addition, if you’re risk averse and want to get a longer loan term than you actually need, with the idea that you’ll either be covered in the event of unexpected financial obligations or will be able to pay off your debt early, make sure to watch out for prepayment penalties.