How to Get a Car Loan in Four Steps

How to Get a Car Loan in Four Steps

A car purchase is an exciting moment. Getting behind the wheel of a car you've been researching and dreaming about is thrilling and a nice reward for your hard work.

But before you drive away and enjoy all of those miles with your new car, there's a lot of legwork you need to complete. Once you've decided on the make and model you want, you have to locate specific examples. And then you have to weed out further reputable sellers you can trust.

The price is undeniably paramount and reflects a combination of vehicle condition, options, and how long it's been on the road. 

But once you decide upon all of that, you may need to get a car loan to pay off your new ride over time. Obtaining auto financing can be tedious, with credit reports, lenders, and your financial situation plays a part in the application process.

When it's time to close the deal and get a car loan, what steps do you need to take? Here are four steps to take to get a car loan.

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1. Find out your credit score

One of the most critical factors for borrowers obtaining a car loan is the credit score. Not only does a borrower's credit score affect their ability to secure a loan, a higher score means lower interest rates and better loan terms.

Your FICO credit score ranges from 300 to 850, spelling out your financial history and whether or not you're a reliable candidate to pay back the money you borrow. 

Credit scores cover five numerical ranges: exceptional, very good, good, fair, and very poor. Their corresponding numerical values are 800–850, 740–799, 670–739, 580–669, and 300–579. 

Several factors determine your score, including payment history, credit mix, length of credit history, credit utilization, and new credit. Among those elements, payment history and credit utilization figure in the strongest, comprising 35 percent and 30 percent of your score. 

Before you seek out auto lenders and apply for financing, it's essential to know where you stand and if you can do anything to bump up your score ahead of time. If you have outstanding obligations, it's vital to bring them up to date and pay them in full. If you notice any errors on your credit report, try contacting your bank to get them worked out.

To find your credit score, check with one of the major credit reporting bureaus, like Experian or Equifax.

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2. Be realistic about your finances

While a particular make and model may have caught your fancy, it's essential to know what you can afford. Financial institutions aren't likely to approve a car loan that's beyond your ability to repay, so being pragmatic during the process is an excellent practice to follow.

One crucial aspect of your finances is known as your debt-to-income ratio. Lenders look at this score during the approval process, and it can either help or hurt you when you apply. Getting it to 40 percent or less is considered a plus and may assist you in getting the financing you want. 

Consider a target vehicle's total monthly cost once you've estimated your monthly income and other financial obligations. While a $30,000 car might seem within your budget, the sum of expenses to drive it month after month add up over time. 

For instance, specific types of vehicles cover a range of running costs related to fuel mileage, insurance expenses, maintenance, and depreciation. Examples include hybrids that use less fuel and electric cars that don't need oil changes. 

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3. Shop around for the best financing

Though looking for the best price on a vehicle is common, shopping around for a good car loan is also important. But whether you have good credit or bad credit, finding a lender with competitive rates and terms that suit you is just as important when you're looking to save money.

Whether your search for financing leads you to a bank, credit union, or online lender, there are some good practices to follow. 

Whenever you submit a credit application, a hard inquiry appears on your credit report. If too many of these inquiries appear, it can negatively affect your credit score. So when you're applying for car loans, it's good to complete them within a short period. Credit reporting bureaus bundle hard inquiries into a single one using this method, keeping your credit score unaffected.

When you decide on a lender to work with, getting pre-approved offers a host of benefits. Applying for pre-approval is an introductory process, where neither you nor the lender is bound to move forward. But pre-approval allows you to see what interest rate, loan amount, and terms you qualify for, further assisting you in budgeting for your purchase. 

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4. Apply for the car loan

Once you've browsed for the best loan rates and terms and selected the lender you'd like to do business with, it's time to complete a loan application. But before going through the process, it's good to pay attention to several details.

Though the interest rate is typical when discussing car loans, the annual percentage rate, or APR, is more comprehensive. The APR takes into account not only the interest you'll owe over the life of the loan but also any additional fees you'll incur.

The loan's term length, usually ranging from 36 to 72 months, spreads out your financial obligation to make your monthly payments more affordable. Sometimes lenders offer lower interest rates on shorter loan terms, so you'll have to weigh that factor when you make a decision. But if you go with a longer term loan, your payments will be less, taking the hit off of your wallet month to month.

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How to get a car loan in summary

Though obtaining a car loan involves several steps, it can be less of a hassle if you know the ones to take. Performing research on your credit score, budget, and available lenders can help you weigh different factors before deciding.

Knowing the different aspects of a car loan like interest rate, APR, and term length prepare you for what to expect as you go through the process of applying. Depending on your financial situation, different terms may fit you better and allow you to drive away in the vehicle you want. 

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Author
Shift Editorial Team