Preparing for an Auto Loan

Getting a car loan is the first step toward buying your next vehicle. However, when you’re ready to take out a car loan, you need to know how to shop for the best rates. Here are some critical steps to help you prepare to take out a loan and find the best one. 

Check Your Credit

Your credit score and income determine how much you can borrow and your interest rates. Therefore, you need to check your credit score before you apply for an auto loan. Be sure that there are no errors or fraudulent activity on your report which could cause you to be turned down or only offered a high-interest rate. 

Apply for Multiple Loans

Some of the most common lenders are:

• Large banks
• Community banks
• Online lenders
• Dealerships

Apply through several different banks and online lenders. For example, your bank might give you a special rate if you intend to use automated payments from your checking or savings account. Just know that by comparing these lenders, you could receive many unsolicited telemarketing calls, and you should place your phone number on the Do Not Call Registry. 

Get Pre Approval

Once you’ve decided on a few lenders, request interest rate quotes. You’ll get lower rates when multiple lenders compete for business. Additionally, each lender values different aspects of your credit report so some rates might be drastically different. Additionally, you’ll want to make sure that the lender you choose has done a preapproval. That will give you a firmer interest rate because they will have more information about your credit than if they do a prequalification. 

Use Your Loan Offer To Create a Budget

Your pre-approval will outline the total amount of money you can borrow from your lenders. That said, you should always add 10 percent to the price of the car you are looking at for taxes and fees. You can use an online loan calculator to understand your budget better. Put in one that accepts your down payments and trade-in value to get an idea of your monthly payments. 

If you’re uncomfortable with the monthly payments of taking the total amount of your loan offer, you can take less. Instead, find an amount you feel comfortable paying each month and use that to set the full price of the vehicle you purchase. 

Find Your Car

Once your budget is established, find the car you want to purchase. Just remember to check your loan offers before you get too far into shopping to see if you have any excluded brands, dealership requirements, lender requirements, or time restrictions. 

Consider the Dealer’s Loan Offer

Once you’ve decided on a vehicle, you may even be able to get a better interest rate from the dealer. Since carmakers have their banks specifically for car loans through dealerships, they may be able to give you a rate that is below the current market average. Additionally, by telling the finance manager that you’ve already gotten preapproval for a specific rate, he’ll probably try to beat it. So applying again won’t harm your credit, and it will allow you to see if you can get that lower rate. 

Finalize Your Loan

Whether you go with the dealer or another provider, you can be sure you have the best financing option available. Pick the loan with the best rate and disregard the other offers. Read the contract thoroughly to ensure you aren’t falling victim to hidden fees, longer loan terms, add-ons, or early payoff penalties. 

If you go with a separate lender who gave you the preapproval, follow their instructions to finalize your loan. Sometimes the dealership will be responsible for arranging that; for others, it’s up to you. 

Getting ready to take out a loan can be a simple process. First, shop around, and you’ll find the best rates. Then, you will have an idea of your budget, which can help you find a suitable vehicle.