If you’re looking for a new car, the financing process can be daunting. But if you arm yourself with knowledge and understand the different steps involved, you can make the process much less daunting.
1. Determine your car loan budget
The question of how much car you can afford is not simple, especially since buying a car can be a major investment. The best answer to this question, however, is based on your budget and your ability to repay the loan. Consider these three main steps.
- Determine your current and future financial situation. Look at your current income and the likelihood of you continuing your current job. If you have a big change coming, consider it.
- Consider the total cost of ownership. Maintenance costs, fuel costs and insurance costs that you will incur must be taken into account.
- Assess other costs. In order to make a financially smart decision, you’ll want to keep a budget and understand what your costs are outside of the car, such as other debt repayments.
2. Check your credit report
The first step to getting approved for a car loan is to review your credit report for errors. Errors such as duplicate accounts, missing payment history, or misspelled names can all lower your credit score and result in a denial.
Check your credit score
A credit score can usually be obtained free of charge from your bank. This is usually your FICO credit score and is updated on a monthly basis.
However, not all credit scores are on the FICO scale. You will need to pay attention to the type of score assigned to you.
Review your credit report
Your credit report is more detailed than your credit score. It contains all the accounts you’ve had for the past seven years, including payment history, how much you owe, and whether you’ve been sued or declared bankrupt.
Credit reports come from the three major credit bureaus: Equifax, Experian and TransUnion. Although you can usually only pull these reports once a year for free, you can currently pull them for free weekly using AnnualCreditReport.com.
Check for errors
Mistakes, like accounts that are listed as paid when they aren’t, or late payments that were reported incorrectly, can all impact your credit score. Check your report to make sure everything is correct.
Make sure any changes are requested 30 days or more before applying. It may take up to 30 days to respond to your request.
Do not open new accounts
Opening a new credit account will temporarily lower your credit score. It’s best to delay opening additional accounts until you have your auto loan, if possible.
Limit the use of your credit card
A high credit card balance can significantly affect your credit score. If you can help it, avoid increasing revolving credit balances and stick to cash payments.
3. Apply for a car loan pre-approval
You can get the pre-approval process before heading to the dealership. In fact, chances are you’ll be offered a lower rate than the pre-approved rate when you walk into the dealership’s finance office. This is because dealerships add a commission to all the rates offered by the lenders they work with.
Pre-approval is also a great way to know exactly how much you can borrow. You can also bargain as if you were buying with cash once you get to the dealership.
It is recommended that you seek pre-approval from at least three lenders to ensure you get the best deal.
4. Buy your car
The next step is to shop. Research different vehicles that suit your needs and go to car dealerships to test drive them. Talk to sellers and compare your options to understand what’s out there, just keep your total buying power close to your chest as this is key in negotiations.
However, it is important to do your research before stepping onto the dealership’s lot. With sites like Edmunds and Kelley Blue Book, you can compare different vehicles and their cost based on make, model, finish, and even your location.
If you’re looking to trade in your current car – especially if you want to buy used – check out online services like Carvana and Vroom. You may get a better deal than you would from a dealership.
5. Finalize the car loan
Once you’ve found the right car loan, confirm the terms of the loan. The lender may ask you to send all the required documents, including proof of insurance, before you agree to the terms and sign the documents.
- Sign the auto loan documents. Once you agree on the terms, sign the documents. If you have a co-applicant or co-signer, that person must also sign the auto loan documents. If you have an auto loan from the dealership, they will provide the auto loan agreement with the lender’s contact information.
- Obtain the title and registration of the vehicle. You must send the title of your vehicle to the lender and update the vehicle registration in your name. The dealer will usually take care of this if you buy one. Otherwise, work with the seller and DMV to update the necessary documents. You will also need proof of insurance.
- Take possession of the vehicle. After obtaining the car loan and closing the sale, you can take possession of the vehicle.
The bottom line
When you’re looking for a new car, the financing process can be daunting, so arm yourself with knowledge. And if you’re not sure how much you can afford, check your credit score before heading to the dealership.