Unless you have been saving for a while, buying a new car (or even a pre-owned car that is new to you) will require a car loan. A car loan will finance the purchase for you, allowing you to make regular car payments with interest over a set period of time. Get a car loan by using financing plans at the car dealer or showing up at the dealer with your own approved loan from a financial institution.
Improving Your Chances of Getting a Good Loan
Request a credit report.
Wherever you shop for a loan, the amount of money available to you as well as the interest rate will depend on your credit scores; it is important to know these before you talk to any lenders.
There are three credit bureaus in the U.S.: Equifax, Experian, and TransUnion. All three calculate scores separately and charge a fee to learn your number score. You are entitled to one free report (not including your score) annually, from each of the agencies. You can request this online or reach out to each company by phone:
- Equifax: 800-685-1111
- Experian: 888-397-3742
- TransUnion: 800-888-4213
Request a correction for any mistakes.
If any of your credit reports record debts, late payments, or anything else that lessens your financial reputation, check against your own records and memories. You are free to dispute any false records or those you deem contestable.
All of the credit unions have an option to dispute. Once you have requested a report online, click the “dispute” button. Enter any relevant facts and proof about the things you think are false. The source of that information (i.e. credit card companies, electric/gas providers, etc.) will be sent a notice and will verify your info within 30 days.
Pay off your debts.
Outstanding payments can take many forms: credit card payments; student loans; electric, gas, internet, phone, and water bills; as well as apartment rental fees. With your credit report in hand, identify the various debts you still have and, ideally, pay them off completely. Of course, you may not have the money to do this. Understanding your own personal budget, pay off as much of your debts as possible. Any progress out of debt will be an improvement to your credit score and make you a more attractive borrower to loan lenders.
Establish a place of residence.
Don’t apply for a loan until you have been living in the same place for at least six months. Lenders check addresses and income for all applicants. Those who appear nomadic (moving often) may seem like a poor choice from their perspective.
Establish a stable income.
This is a common mistake for recent graduates, but applies to all loan applicants. Showing that you have a consistent source of income for at least the past six months will also make you a more attractive borrower.
Establish a savings history. Even if it is in small increments, evidence that you can and will consistently save money offers further proof of your financial responsibility. This in turn promotes your likelihood of receiving a loan, because it shows you are also likely to be able to make loan payments.
Take a small portion (5 – 10%) of your monthly income and deposit it in your savings account each time. Over time this will add up and establish your savings history.
Pick a car you can afford.
Keep in mind your credit score and your personal budget. Whether your credit is ‘‘deep subprime’’ (500 and below), ‘‘subprime’’ (501 – 600), ‘‘non prime’’ (601 – 660), or even higher, will affect your choice. For example, with deep subprime credit, if your monthly budget is already slim, then most likely you will want to be looking for a used car. Although it is true new cars often come with lower interest rates, with lower credit scores, you will end up with larger monthly payments that you may not be able to afford.
Online databases like Craigslist, Auto Trader, and eBay Motors are all a good place to begin your search for an affordable car.
Save for a down payment.
Especially for people with subprime credit and below, many loans will entail at least a 10% down payment. It is also possible to trade in other vehicles as down payment, though this may not always be possible. In any case, the more money (or trade value) you present to lenders, the more likely you will be approved.
Prepare the necessary documents.
The main things you will be proving are residency and income. Utility bills, rental agreements, mortgage statements, and in some cases cell phone bills are acceptable proof of residency. Pay stubs, as well as official W-2 or 1099 forms, are most commonly requested to prove income. In the case of food service jobs and other similar positions where much of the income is in cash tips, bring bank statements. If you have been depositing that money, their consistent presence on your bank statements will be reassuring to your lender.
Make sure that your name is printed on all documents.
Documents that are 30 days old or less are preferred.
If you stop making loan payments, repo trucks will come to the address you provide.
Getting Pre-Approved Before Visiting a Dealer
Contact credit unions.
Credit unions are non-profit organizations owned by the members, and are known for offering competitive loan rates.
If you want a car loan with low interest and flexible repayment terms, belonging to a credit union may offer the most attractive option.
Be sure to ask whether they have an approved dealer list. If the car dealer or person you’re doing business with is not included, you will need to look for another lender or perhaps choose a different dealer.
Apply for a car loan through banks.
A car loan from a bank will require better credit and in some cases, a pre-existing banking relationship. Although this option often requires higher credit scores, if you qualify, banks typically offer competitive loan rates.
Inspect the terms and interest rates. The higher credit standards often held by banks usually means they can offer better terms. Use a bank loan only if the interest and payment terms are better than what you find through your other options.
Make sure that the car dealership you are working with is on the bank’s list of approved dealers. Otherwise you will have to find a different lender, or choose another dealer.
Apply through online lenders.
Capital One, Up2Drive, Blue Harbor and other financial institutions offer car financing and often partner with specific dealers to offer low rates on particular cars. Applying online has another advantage because it encourages financial institutions to compete to win you over, and likely will produce a competitive rate.
Be aware that working through online lenders creates the risk of your personal information being shared insecurely. This could lead to you getting contacted by lenders to whom you have no connection. Be safe and check the website with the Better Business Bureau.
Borrow only what you need.
You may have money saved up for a down payment, or you could plan to trade in an old car. Only get a loan for the balance of what your new car will cost.
Before committing to one lender, make sure to contact as many lenders as possible. Compare the interest rates, max amount, and terms of each offer. When looking at loans, you must consider the APR (annual percentage rate) and the term (time period over which it is paid).
Longer terms may seem attractive as they give you more time to pay off a loan. However, depending on the rate you agree upon, a longer term can result in you paying more in interest than you would have with a shorter term.
Cars acquired through long-term loans will build equity more slowly than short-term loans. This means that if you decide to trade-in or sell your car earlier than expected, you won’t earn enough money to pay the remainder of the loan. This is called being upside-down.
Use this outside financing to negotiate with the car dealer.
When you show up with financing already in hand, you are in a strong position to get a better price for the car you want.
See if the dealer can beat the terms for the car loan for which you are already approved. Use your loan as a bargaining chip when you negotiate.
Loaning from a Dealership
Make sure it is your only option.
Car dealerships are notorious for taking advantage of clienteles who come for financing. Before you consider this option, try getting a loan from banks, credit unions, and online lenders. Beware any offers for “spot delivery.”
Dealers offer this before finalizing and signing terms of financing only to force higher rates at a later date. Read the complete wording of any contracts and agreements you sign.
Review state laws surrounding auto financing. In some cases, like Illinois, the dealer is required to return your down payment and/or trade in should they be unable to find financing at the rate stated in your contract.
Find the car’s true value.
Dealers may try to sell cars to you for far more than they are worth. Similarly, they may try to make a profit on auto loans. Talk with your personal bank or credit union for advice on the vehicle’s value. Keep this in mind during negotiations.
Kelley Blue Book and Edmunds both offer helpful search engines as a resource to find used and new cars’ true value.
Come armed with all your credit information.
The first thing the dealer will do when you apply for a car loan is run a credit check. Know where you stand before you apply so they cannot use your ignorance to negotiate a bad deal. Similarly, bring any pre-approved loans you have acquired with you. Your knowledge will be a powerful bargaining tool and protect you against unfair or deceitful business tactics.
Talk to your salesperson about any current deals.
Some dealerships will offer zero percent financing or allow you to skip your first couple of car payments. This will also depend on your credit.
Do the math. Getting your car loan from the dealer means you run the risk of confusing the actual price of the car with what you will pay on a monthly basis after the interest and other financing costs are considered. Be aware of how much you can afford to pay each month, but do not tell the salesperson.
Negotiate for the lowest price on the car with the confidence you gained through researching your credit and other loan options.
Settle on the price of the car when you are negotiating, not the monthly car payment.
Make a down payment or offer a trade-in.
When you obtain your car loan through the dealer, a larger down payment or a valuable trade-in will help you reach better financing terms.
Avoid any scams.
Some dealers will use deceitful tricks to gouge more money from people, or try to include attractive but unnecessary costs in the deal. The most common in car dealerships are the yo-yo trap and upselling.
The yo-yo trap involves offering conditional financing so purchasers can take home their car that day. Days or weeks later, the dealer will call and say the financing won’t go through and you now have to pay a higher interest rate. To avoid this, tell the dealer you won’t accept delivery of the car until financing is final.
Upselling focuses on selling you add-ons like extended warranties and rustproofing during the negotiation of financing. You can purchase any of these things after the fact. Be sure to exclude them from the conversation until financing and car cost are decided in print and signed.
Review the details of your loan in writing.
Make sure you understand the price of the car, associated costs, the amount of your down payment, the interest rate, what your monthly car payment will be, when it will be due and how long until you have the car paid off