8 Insider Tips to Getting Approved for an Auto Loan

8 Insider Tips for Getting Approved for an Auto Loan

So you've finally found the car of your dreams and you're ready to drive it home. The only thing standing between you and those shiny new wheels is getting approved for an auto loan. Don't worry, we've got you covered. We talked to experts in the auto finance industry and found eight insider tips to boost your chances of getting approved so you'll be cruising around town in no time.

Whether you have bad credit or no credit history at all, these tips will help ensure the finance manager says "Congratulations, your auto loan application has been approved!" Follow these recommendations and you'll be well on your way to owning that perfect car you've had your eye on. The only thing left to decide is whether you want to blast the radio or just roll the windows down and enjoy the new car smell. Happy driving!

Understanding Auto Loans: Types of Financing and Lenders

When buying a new set of wheels, you've got a few options for financing the purchase. The two most common types of auto loans are direct and indirect.

Direct Lending

With direct lending, you borrow money straight from a bank, credit union, or online lender. Rates are often lower since there's no dealer markup, but you'll have to do some legwork to compare offers and handle the application process yourself. Some well-known direct lenders include LightStream, PenFed Credit Union, and Digital Federal Credit Union (DCU).

Indirect Lending

Most people end up going through the dealership, which arranges an indirect auto loan with a third-party lender like Chase, Wells Fargo, or Capital One. While convenient, indirect loans typically have higher interest rates. The dealer acts as the middleman, handling the application and paperwork for you but also tacking on extra fees for themselves.

To get the best deal, check your credit score and shop around at different banks and credit unions before heading to the dealer. See what kind of rates and terms you qualify for, then use those preapprovals as leverage to negotiate the best overall financing package. With the right strategy and some patience finding the perfect set of wheels, you'll be cruising off the lot in no time!

8 Tips for Getting Approved for an Auto Loan

To get approved for an auto loan and drive off in your dream car, follow these insider tips:

Check Your Credit Score

Know your credit score before you start shopping. Scores above 700 will qualify you for the best rates. If yours is lower, work to improve it by paying down debt and limiting new applications.

Compare Rates

Get preapproved with your bank or credit union and compare their offer to dealership financing. Look for the lowest APR, total interest paid, and best terms. Preapproval also gives you negotiating leverage.

Put Down a Large Down Payment

The more money you put down, the less risk for the lender and the better your chances of approval. Aim for at least 20% of the purchase price.

Keep Your Debt-to-Income Ratio Low

Your DTI compares your monthly debt payments to your income. Keep it under 36% for the best approval odds. Pay off or pay down other debts like credit cards before applying.

Check Your Credit Report for Errors

Dispute any errors on your credit report with the credit bureaus to make sure it's accurate. Mistakes on your report could hurt your approval chances.

Consider a Cosigner

If your credit isn't strong enough, ask a parent, relative, or friend with good credit to cosign the loan. Make sure the cosigner understands they will be responsible for payments if you default.

Provide Verifiable Information

Be prepared to provide proof of your income, employment, address, etc. Make sure the information you provide matches what's on your credit report and other documents.

Talk to Your Lender

Discuss your situation with your lender and ask what else you can provide to strengthen your application, e.g. pay stubs, tax returns, bank statements, a budget showing how you will afford payments. The more info you give them, the more comfortable they'll feel approving your loan.

Frequently Asked Questions About Auto Loans

Frequently Asked Questions About Auto Loans

When financing a vehicle, you likely have some questions about auto loans. Here are some common FAQs to help put you at ease.

Do I need a down payment? A down payment is not always required, but it can help you get approved and often lowers your interest rate. Even a small down payment, like 10-20% of the vehicle’s value, makes you appear less risky to lenders.

Will a cosigner help? If you have little or bad credit, a cosigner with good credit can help you qualify and get a better rate. But keep in mind, the cosigner is legally obligated to make payments if you default.

How is my interest rate determined? Your interest rate depends on your credit score, the vehicle you want to finance, and other factors like your down payment and loan term. In general, the higher your score and down payment and the newer the vehicle, the lower your rate.

Should I get preapproved? Getting preapproved by a lender before you start shopping puts you in a stronger negotiating position. Dealers may be willing to beat a preapproval offer to earn your business. At a minimum, check your credit and scores so you know your range.

What loan term should I choose? A longer loan term, like 60-72 months, means lower payments but higher interest paid over the life of the loan. A shorter term, like 36-48 months, has higher payments but you pay less interest and own the vehicle sooner. Choose a term that fits your budget and needs.

How much should I borrow? A good rule of thumb is to borrow no more than 20% of your take-home pay for a down payment, fees, and monthly payments. So if you take home $3,000 a month, limit your total auto loan to $600 a month or less. This helps ensure the payments remain affordable in your budget long-term.

Does the dealer handle the financing? Dealers typically offer financing through lending partners. But you can also get preapproved by your own bank or credit union before shopping. Compare offers from different sources to find the best overall deal based on rates, fees, and loan terms. You have the power to choose the offer that’s right for your needs.

Conclusion

So there you have it, eight insider tips to boost your odds of getting approved for an auto loan and driving off the lot in your dream car. While the process can seem overwhelming, especially if your credit isn't perfect, following these tips will set you up for success. Do your research, check your credit, set a budget, find the right lender, provide documentation, consider a cosigner if needed, negotiate the best deal, and don't hesitate to ask questions. You've got this! With some preparation and persistence, you'll be cruising down the road in no time. So start revving your engine and get ready to ride - your new set of wheels is waiting for you!