Unless you have a lot of disposable income, have been saving up for years, or have recently inherited a windfall, the chances are high that you’re going to need to get a loan if you plan on buying a new car — or even a used car! A car loan is a great way to handle this sort of expense, but you may have never given much thought to how you actually go about getting a car loan.
When it comes to comparing your car finance options, it doesn’t matter if you’re visiting a Dodge dealership in Enfield, CT or a Toyota dealership in New South Wales. This is because there are a few standard aspects of getting a car loan that will be the same regardless of whether you’re looking for a new vehicle or a used vehicle anywhere in the world. Here’s what you need to know when it comes to understanding the ins and outs of how to qualify for a car loan and get behind the wheel of the vehicle of your dreams.
Know your credit score — and fix it if necessary!
Your credit score is a major determinant in not only the amount of car loan you can take out but what your interest rate is, too. Put simply, the lower your credit score is, the lower the amount you can expect to qualify for when it comes to getting an auto loan and the higher your interest rate will be. While an interest rate may be the least of your concerns if you know that you want to buy a car that’s $10,000, it’s important to note that your interest rate has a major impact on how much you pay over the life of your auto loan.
For example, if the annual percentage rate is 5 percent and your loan amount is $10,000, you’ll actually wind up paying $11,323 total in principal and interest payments. That being said, if you have worse credit and get an auto loan rate of 11 percent, you’ll end up paying $13,045 over the course of your 5-year loan. Clearly, it pays to have good credit!
Provide proof of income.
In order to qualify for any loan, whether it’s a mortgage or a car loan, you’ll need to provide proof of your income. Usually, you can do this by providing a few months’ worth of paystubs or sharing your tax filings from the previous year. Some lenders like to know how much income you have and calculate something called your debt-to-income ratio, or DTI, and this sort of documentation is crucial for helping them make those calculations.
Have documentation that confirms your identity and residence.
If you’re getting a car loan, it’s also important to be able to confirm that you are who you say you are. You’ll want to provide proof of residence and your identity (your driver’s license and a piece of mail for a utility bill will usually do the trick), since these items ensure that any documents your lender may need to send you will reach you.
Bring a down payment or trade-in to the table.
One of the best ways to end up paying less each month when getting an auto loan is to put down a down payment or even a trade-in amount when you’re getting your loan. For example, even putting $1,000 towards the purchase of your $10,000 vehicle could result in a much lower monthly payment. In both examples above, you’d only wind up paying $10,190 and $11,741 respectively if you were able to put down $1,000 towards the purchase of your car and only take out a loan of $9,000. If you can trade-in your existing vehicle, you may be able to get even more taken away from your overall costs, since most used vehicles trade-in for at least $2,000.
Image by Jay Lamping from Pixabay
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