Many potential car buyers find themselves in this situation, and quite a few turn to auto loans to help them afford the full price of a car.
Qualifying for an auto loan is easier in this market than ever before, but there are still a few basic ways to qualify for an auto loan that all applicants should keep in mind.
1. Improve Your Credit Score
A decent credit score is an important part of qualifying for an auto loan. To ensure that your credit score is acceptable, clear up any errors with your credit card company. Check your credit score with one of the major credit bureaus to make sure there are no fraudulent charges. Once you’ve cleared up any mistakes on your record, take care that you pay your bills on time. It’s the single easiest way to help boost your credit score. If you have trouble remembering to make payments, consider setting up automatic deductions. Your credit score may not improve by the time you need to purchase a car; in that situation, consider a to turning a co-signer, someone who will pay the loan if you default on your payments.
2. How Much Can You Afford?
The amount of money that you spend on your car should never account for more than 20% of your take-home pay. It’s important to factor in the cost of taxes, maintenance, repairs, interest rate, insurance payments, and fuel into the total cost of car ownership. Also consider your down payment when you make your financial calculations. Whether you’re trading in an old car or just have a little cash stashed away, a significant down payment will lower the amount of the loan you need to take out. It will also mean you pay less in the long run because your interest payments will be lower as well. Use a loan calculator to figure out how much you’ll end up spending and owing.
3. Shop Around
Before deciding where you’re going to take out a loan, apply at a few places all within a two-week window so that it doesn’t damage your credit score as much. Every time a company checks your credit to see if you can qualify for a loan, it will put a dent in your credit score. But if every company checks it within two weeks, it will only count as one source. When you go about applying, take all the necessary documents with you every time. Lenders may ask you for:
Proof of Residence
Most lenders will require that you have a permanent residence to qualify for a loan. To provide proof of residence, bring in a utility bill or a bank statement with your home address on it.
If you have a specific vehicle in mind, be sure to bring in detailed information from the dealer. Your lender may be more likely to offer you a good rate if they recognize that you have done your research responsibly and are financially prepared to take on the burden of an auto loan.
Proof of Insurance
Before you are approved to take out a loan for your car, you’ll need to prove that you have insurance that can cover it. While not required by law, having insurance makes it much more likely that a lender will offer you financing. It shows you are dedicated to making sure that you can afford your car and being responsible.
Proof of Income
A steady source of income is one of the strongest factors that lenders consider when you apply for a loan. Pay stubs and bank statements are sufficient documentation to prove that you are employed, but the lender will also contact your employer in order to verify your statement. Before you sign any loan documents, it’s essential that you understand the terms of the agreement. Be sure that you have a comprehensive knowledge of your loan details including the total cost of the loan, how much interest you’ll end up paying, and the amount you’ll owe each month. When you shop around for loans, let the lenders know that you’re applying elsewhere as well. Avoid any kind of conditional financing so that you remain free to accept the best offer available. Purchasing a car is a big decision that requires substantial financial responsibility. Understand all the options available to you before you commit to any agreement.
Rachel Schramm writes articles for Allied Cash Advance about online commerce, responsible borrowing, investment, and budgeting. Allied Cash Advance is a responsible cash advance and payday loans lender.