Understanding the Car Loan Process: A Comprehensive Guide

Purchasing a car is one of the most significant financial decisions you’ll make. Before diving into the car loan process, it’s crucial to understand the steps involved to ensure you get the best deal possible. While having a dealer arrange financing can speed up the process, you might secure a better interest rate by applying on your own and getting preapproved before heading to the dealership. Here are six essential steps to help you navigate the car loan process effectively.

Determine Your Budget

According to Experian’s Q3 2023 State of the Automotive Finance Market report, nearly 80% of new car buyers and roughly 38% of used car buyers finance their purchases. The average monthly payment is $726 for new cars and $533 for used cars. Depending on your budget, you may need to adjust your expectations. Assess your budget to determine how much you can afford to spend on a monthly payment and other ongoing costs of ownership, including:

• Insurance premiums
• Fuel or electricity
• Maintenance
• Repairs

Additionally, consider other monthly debt obligations, such as credit cards, student loans, and a mortgage. Auto lenders typically prefer a debt-to-income ratio—the percentage of your gross monthly income that goes toward debt payments—below 50%, but the lower it is, the better.

Check Your Credit Score

Your credit score is a crucial factor in determining your eligibility for an auto loan and the terms you qualify for. You can check your FICO® Score for free with Experian to get an idea of where you stand. Here’s a quick summary of the different FICO® Score ranges:

• Exceptional: 800 to 850
• Very good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579

Note that the credit score you see may differ from the one the lender uses. Many auto lenders use the FICO Auto Score, which ranges between 250 and 900. However, your base FICO® Score can still help you gauge your creditworthiness.

What Credit Score Do I Need for a Car Loan?

There’s no general minimum credit score requirement to get approved for an auto loan—some lenders even specialize in working with bad-credit borrowers. However, individual lenders will have minimum creditworthiness criteria, and if your score is in the fair or poor range, you’ll likely end up with a steep interest rate and monthly payment.

Compare Auto Loans

Once you’ve assessed your credit health, shop around and compare auto loan offers from various lenders. Many lenders offer a prequalification tool that allows you to get an idea of your loan terms without impacting your credit score. In addition to interest rates, consider repayment terms, prepayment penalties, and other terms.

Some options to consider include:

• Banks: If you have an existing relationship with a bank, check to see if you qualify for a relationship discount.
• Credit unions: Credit unions often offer lower interest rates than traditional banks, but you must be a member to get approved for a loan. In some cases, you can join during the application process.
• Online lenders: Online lenders are more likely to allow prequalification, and some marketplace websites even make it possible to get quotes from multiple lenders with just a single online form. Interest rates can also be comparable with credit union rates.

If you submit an official application to more than one lender, try to do it in a short period to minimize the impact on your credit score.

Get Preapproved for a Car Loan

Getting preapproved for a car loan involves completing a preliminary application with a lender who will review your credit and other financial information. They’ll let you know the size of the loan they’ll finance and the interest rate they’re likely to offer. Unlike prequalification, preapproval typically involves a hard inquiry, which can impact your credit. However, preapproval can make it easier to find the best interest rate because the decision is based on more complete information. Some details you may need to provide include:

• Full name
• Social Security number
• Date of birth
• Address
• Contact information
• Vehicle make and model
• Desired loan amount

Note that preapproval doesn’t obligate you or the lender to enter into a loan agreement.

Visit One or More Dealerships

Once you’ve been preapproved, take some time to research dealers in your area to compare sales prices. This information can make it easier to negotiate the price and ensure you get the best deal. With your preapproval in hand, you can also minimize the discussion about financing, which is often the most time-consuming aspect of the process.

Finalize the Loan

After reaching an agreement with the dealer, contact your lender to finalize the loan terms. You may need to provide additional documentation at this point, including:

• Proof of income
• Proof of residence
• Proof of insurance
• The vehicle purchase agreement

If you’re approved, you’ll receive a loan agreement detailing the terms and conditions of the contract. Review the agreement carefully, then sign it to complete the process. Note your first payment due date and set up automatic payments before then.

Frequently Asked Questions

Can I Use a Car Loan to Buy a Car From a Private Seller?

Yes, many lenders allow you to use a car loan to purchase a vehicle from a private seller. However, the process may involve additional steps, such as verifying the vehicle’s condition and value.

Where Is the Best Place to Get a Car Loan?

The best place to get a car loan depends on your financial situation and preferences. Banks, credit unions, and online lenders all offer competitive rates and terms. It’s essential to compare offers from multiple lenders to find the best deal.

How to Get a Car Loan With Bad Credit

If you have bad credit, consider working with lenders that specialize in bad-credit auto loans. You may also want to save for a larger down payment to reduce the loan amount and improve your chances of approval. Additionally, take steps to improve your credit score before applying for a loan.

Make an Informed Decision

A car loan can be a great way to purchase a vehicle while building your credit. However, even if you need a new car urgently, it’s essential to take your time to shop around for the best loan deal and understand all the terms and conditions before signing for a loan. If your credit needs some work and your vehicle situation isn’t urgent, review your credit score and credit report for free and make improvements based on what you find. Once you know your credit standing and what you need to do to improve it, you’ll be better informed about your options and next steps.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. Our team of experts is here to help you navigate the car loan process and secure the best financing options available.