How To Get Approved for a Car Loan

Unless you have enough savings to buy a vehicle outright, you’ll likely need an auto loan to finance your purchase. Understanding the financing process is essential, as it can help you plan your budget and secure the best possible terms. Check out this helpful guide to learn how to handle different aspects of auto financing, including budgeting, credit score checks, preapproval, and finalizing the loan.

Determine Your Budget

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Setting a proper budget ensures you can comfortably afford car payments, minimizing financial stress and preventing late or missed monthly installments. To calculate your budget, subtract your living expenses, debts, and other financial obligations from your monthly income. The remaining amount is what you can spend on your new vehicle. Besides your car payments, you must also factor in other ownership expenses, such as insurance, fuel, and maintenance.

To strike the right balance between financial responsibility and the desire for a new vehicle, consider following the 20/4/10 rule. This means making a 20% down payment, taking out a four-year loan, and spending no more than 10% of your income on your car payments and other vehicle-related expenses.

Check Your Credit Score

Knowing your credit score before applying for auto financing is essential because it can significantly impact your car loan. An outstanding credit score indicates an impressive track record of keeping up with your debt obligations, making you a low-risk borrower. In this case, lenders are more willing to approve your loan application and offer favorable terms. If your credit score isn’t so great, they’ll regard you as a high-risk borrower, which can undermine your  loan approval chances  and raise your interest rate.

If bad credit is preventing you from securing auto financing, you can take the following measures to improve your score:

• Check your credit report for errors and dispute them.
• Pay down or pay off your existing debts.
• Make loan and credit card payments on time.
• Don’t max out your credit cards; try to keep your balance to no more than 20% of your credit limit.

What Credit Score Do I Need for a Car Loan?

There isn’t a specific minimum credit score for getting  auto financing. Credit requirements vary depending on the lender and the type of car loan you’re seeking. Traditional lenders, such as banks and credit unions, tend to have more stringent eligibility requirements, while third-party lenders are more willing to offer loans to credit-challenged borrowers.

According to an Experian study, nearly 69% of car buyers seeking financing have credit scores of at least 661. Borrowers with credit scores ranging from 501 to 600 make up 13% of all vehicles financed, while those with scores of 500 or lower account for approximately 2%.

To understand how your credit score affects the interest rate on your auto loan, let’s look at the average annual percentage rates for different credit tiers:

• Superprime (781 to 850): 5.38% for  new cars  and 6.8% for used cars.
• Prime (661 to 780): 6.89% for new cars and 9.04% for used cars.
• Nonprime (601 to 660): 9.62% for new cars and 13.72% for used cars.
• Subprime (501 to 600): 12.85% for new cars and 18.97% for used cars.
• Deep subprime (300 to 500): 15.62% for new cars and 21.57% for used cars.

A car buyer with a credit score in the low 700s may see an interest rate of around 9.04% when financing a used vehicle. That’s significantly lower than the average 18.97% rate for someone scoring in the mid-500s. Suppose the car’s price is $20,000, the loan term is five years, and the buyer makes no down payment. The buyer with the prime credit score has a monthly fee of about $416, whereas the subprime borrower pays about $518 monthly.

Get Preapproved for a Car Loan

Before you start shopping for your next vehicle, it’s a good idea to  get preapproved  for an auto loan. Preapproval lets you know how much you can borrow to finance your car purchase, allowing you to choose a vehicle you can comfortably afford. It also helps strengthen your negotiation position, allowing you to get a better deal.

You can get preapproved for a car loan at most banks, credit unions, and dealerships. The documents and information required for preapproval may differ from one lender to another. However, they typically include your personal details, housing information, employment and income information, loan details, and, if applicable, trade-in information.

Finalize the Car Loan

After you’ve decided which vehicle to buy, you can negotiate for more favorable car loan terms. Some things you can do to get a better deal include negotiating a lower purchase price, making a larger down payment, and leveraging the power of preapproval. You may also want to consider refinancing if conditions improve in the future.

Before you sign the auto loan agreement, carefully review the loan terms and all applicable fees to ensure everything aligns with what you’ve agreed to. Also, make sure both you and the dealer have signed the agreement. After finalizing the loan, the dealer will give you copies of all the paperwork. You’ll also receive a message from your lender about how and when to make payments.

Ready To Drive Your Dream Car?

If you’re looking for a car loan in Palestine, Texas, consider contacting our Palestine Toyota finance team. Our finance center offers various auto financing options that we can tailor to your specific needs and preferences, including traditional loans and bad credit loans. Regardless of your financial circumstances, our friendly and knowledgeable finance experts can help you explore your choices, find a suitable loan, and get your application approved. To begin the process, contact us  by phone, fill out our online form, or visit our dealership.