What You Need to Know Before Applying for an Auto Loan

Auto Loans 101

Simply put, an auto loan is when you borrow money from a financial institution to buy a car. The loan is secured by the car itself, where the car is the collateral for the loan. You'll have to make monthly payments on the car, including interest and fees, to repay this loan. The length of the loan can be anywhere from 2 to 7 years, depending on various factors, such as the amount paid back each month. Keep reading to learn more about auto loans and how to get started once you find your dream car.

Key Terms to Understand for Car Loans

Do you have your new car in mind? Are you planning to get a car loan? You'll need to familiarize yourself with the terms below.

Down payment: A down payment refers to the initial payment made by you, the buyer, towards the purchase of the vehicle. Some lenders, such as banks and credit unions, may ask you to have a down payment of 10-20% of the vehicle's purchase price.

APR: APR is the annual percentage rate. It applies to all the money you borrow, including interest and other auto loan fees. Check the APR rates before submitting your application; a higher percentage means a higher loan amount. You can get a lower interest rate by having a good credit score and lowering the terms.

Principal: This is the initial amount of money borrowed or the original sum of a loan owed to a lender. It does not include any interest or fees that may be added over time.

Term: This is the amount of time you are obligated to repay the auto loan. It indicates the duration of the loan agreement. It determines the number of installments or payments needed to fully repay the borrowed amount, including any interest or fees.

Cosigner: An individual who agrees to take joint responsibility for a loan with the borrower. For those with bad credit scores, cosigners can help increase the chances of being pre-approved for loans. Cosigners should be trusted individuals in your life who can help take on the financial responsibility of your loan.

Check Your Credit Score

After picking a vehicle, the next step is to check your credit score. Your credit score can directly influence your chances of getting an auto loan, how much you will be allowed to borrow, and the interest rates that can be offered to you.

Borrowers with good credit scores, approximately 670 and up, have a better chance of getting approved for the loan through direct financing, such as banks or credit unions. They may get lower interest rates, although this also depends on the agreed term - the lower the term, the lower the interest rate.

Banks perform creditworthiness checks on their potential borrowers to determine if they qualify for the loan. You may not get approved with a low credit score. If you have bad credit, you can also get financing for a car loan through online lenders or in-house financing. You can talk to us to help you make an informed decision on choosing the best financing for your car loan.

There are various ways of checking your credit scores from Experian, Equifax, and TransUnion, including requesting your score from these three reporting agencies directly or using a reputable website like AnnualCreditReport.com. Understand your credit score's rating and thoroughly check for any errors affecting your credit score. If there are any errors, correct these inconsistencies ASAP to increase your score and your chances of getting an auto loan approval with a lower interest rate.

Understand Your Budget

The overall loan amount should include the vehicle's purchase price, the interest,  APR, taxes, down payment, other fees set by the seller, and optional add-on products. While shopping for auto loan offers, don't forget to compare rates from different lenders to help you make an informed decision. 

You can reduce the loan amount by choosing lower terms - although this also means higher monthly fees - and skipping add-on features and other options. You may even save up for a larger down payment to avoid borrowing more money. The type of car also matters when determining your budget and how much to save or borrow. Of course, it's more expensive to buy a brand-new car. Consider a high-quality secondhand vehicle to lower the loan amount.

It's essential to understand your budget before getting a pre-approval. An auto loan is a secure debt, which means the vehicle serves as collateral. If you don't plan ahead, you may end up losing your car.

Auto Loan Pre-approval

Applying for pre-approvals is similar to applying for an auto loan-you have to complete an application and submit the required documents to the lender of your choice. These documents may include your social security number, home address, employment history, income from all sources, and information about your other debts. After applying, the financial institution will check your creditworthiness to determine if you qualify for the pre-approval. During the prequalification process, banks will do a soft pull of your credit. Soft pulls won't impact your credit score, even if you don't get the pre-approval. 

After you're pre-approved, banks or credit unions may do a hard inquiry on your credit and continue to verify your information. This process can take several weeks, as banks may call your employer and thoroughly check your submitted income documents. 

Note that a pre-approval doesn't guarantee a loan offer. You'll still need to submit a complete application to determine approval. For borrowers denied by traditional banks, other financing options include online lending or in-house dealership financing. 

What Affects Car Loan Approval

Below are the factors that affect the approval of an auto loan application:

Credit score: Banks usually look at the borrower's credit score first. If it's lower than 600, chances are the bank may not pre-approve the auto loan. Work on your credit score to increase your chances of getting an auto loan approval.

Age of the vehicle: An auto loan is usually a secured loan, which means that the vehicle serves as collateral for the loan. When the borrower fails to comply with the auto loan agreement, the financial institution has the right to acquire the vehicle. If you're buying a used car, the lender may need to check its market value to help decide whether you should get the approval.

Income: How much are you earning every month? Do you have enough to cover other debts and monthly expenses while paying for the auto loan? Pay stubs and tax returns are used to show your capacity to pay. You may not get pre-approved if your income isn't enough. If you don't qualify, getting a cosigner may help. A cosigner is a person willing to settle your financial obligations if you miss your monthly loan payments. Make sure they have a good credit score to get an approval.

Always check several auto loan options to find the one best suits your circumstances.

By taking these steps and being well-informed, you can make a confident and informed decision when applying for an auto loan. Auto-Mattox helps Appotomox, VA buyers through the financing process for their dream car. Contact us today to get started.