Reliable transportation is a must for busy adults. And while many people would prefer paying cash for an automobile and avoiding a car payment, not everyone has this kind of cash on hand. Fortunately, auto lenders provide financing, which allows buyers to purchase a new or used vehicle. But before applying for an auto loan, it's smart to familiarize yourself with lending requirements.
Improve Credit History
You don't need perfect credit to get approved for an auto loan, and many lenders work with people who have bad credit and no credit history. But just because you can finance an automobile with poor credit doesn't mean you should. Your credit rating determines your finance rate, which in turn impacts your monthly payment. Someone with an excellent credit history may qualify for a 4 percent interest rate, whereas someone with bad credit may acquire an interest rate of 9 percent or higher. Fix your credit before completing an application. Pay your bills on time and pay down your debts. Check your credit score after a few months to assess your improvements. A score of 700 or higher can help you get the best rates.
Income History
A steady source of income is another requirement for getting a car loan. Self-employed individuals will need to provide tax returns for the past two years, whereas someone with an outside job will need to supply his most recent paycheck stubs. Some lenders will contact employers to verify length of employment, whereas others do not require proof of income if the borrower meets the minimum credit score requirement.
Down Payment and Co-signer
Interest rates and monthly payments determine whether you're able to afford a used or new automobile. And if the auto lender is hesitant to approve you for a low rate auto loan, putting money down on the vehicle or having a co-signer can help you negotiate a better rate.
A down payment lowers the amount you'll need to finance, which reduces your monthly payment. Put down as much as you can afford, but typical down payments range between 10 and 20 percent of the sale price. Co-signers are beneficial when you don't have good credit or a long credit history. But to benefit from a co-signer, you'll need to select someone with good credit and an income source.
Secure Your Own Financing
Dealerships want you to use their finance department so that they can also make money on the deal. The finance company charges an interest rate, but the dealer may increase the rate to add to its bottom line. Shopping around and securing your own financing from your personal bank or credit union can help you acquire the lowest rate on the auto loan.
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