Excited to get an auto loan and purchase the car of your dreams but are afraid bad credit will take you down?
C1 Car Loans has got you covered!
Bad credit isn’t what you should be worried about because a credit score isn’t always a fair indicator of your financial condition. You need to focus on several other things when applying for a car loan to maximize your approval chances.
This guide features the dos and don’ts of car loan applications to help you make a well-informed decision.
Things You Need to Do Before Applying for a Car Loan
Follow the steps below, and you’ll be well on your way to securing a car loan.
1. Determine Your Budget
One of the first things a car loan provider may ask you is your monthly budget. Some people focus on the loan’s monthly payment and overlook the total financing cost. Often, they’re so concerned about which car to get based on the monthly payment they can afford that they end up agreeing on a term much longer than desired.
Please don’t make this mistake.
While a longer-term means reduced monthly payments, you’ll have to walk around with that burden for a few extra years and probably have to pay more interest.
The right way to approach a car loan is by considering the overall cost of the car. This includes the total number of monthly payments and the interest rate. With this in mind, see if a particular car fits your monthly budget.
2. Fetch Your Credit Report
This is one of the most important things you need to do before applying for a car loan. While a bad credit score doesn’t stop you from getting a loan, it’ll likely have an impact on the interest rate of your loan.
With poor credit, you may qualify for higher interest rates. Some people proceed anyway, while others think it’s better to wait and improve their credit score first. Thankfully, C1 Car Loans conducts a fair assessment of car finance applications, considering a wide range of factors to gauge your current monetary situation. This means you’ll have an equal chance, even if you’ve been rejected in the past.
On the other hand, if you have good credit, you’ll be able to use your credit score as a bargaining chip to convince lenders to offer better loan terms.
As a rule of thumb, you should regularly collect your reports from credit bureaus for at least six months before applying for a car loan.
3. Know the Charges and Interest Rates
The options in the car lending marketplace are endless. To get the best charges and interest rates, you should collect quotes from multiple lenders and compare your options. You’d want to secure a reducing balance loan with low charges and interest rates.
In general, car loans terms can stretch for 7-8 years. This means you’ll have a long-term relationship with the lender. Hence, the charges you pay throughout this period also matter.
4. Gather the Necessary Documents
To complete the loan application process, you’ll have to share some personal details, like your name, age, and address, along with employment info and proof of income. You must know which documents lenders typically ask for and get them to ensure a seamless process.
For example, if you’re a salaried employee, you’ll have to provide salary slips and recent income tax statements.
5. Inquire about Prepayment and Foreclosure Charges
This is one of the most important things you need to do before applying for a loan. Lenders usually require prepayment charges on fixed interest rate loans. It can be 5-6% of the outstanding amount.
Moreover, some lenders set a minimum number of prepayments for the loan period. If you want to go for fixed-rate auto loans, you should look for lenders charging the least and imposing minimal restrictions on repayments.
6. Get Preapproved for a Car Loan
Once you find a lender offering reasonable loan terms, you should consider getting preapproved. This process will involve the lender giving you a final quote for the loan and a preapproval letter.
You can take the letter with you when you go car shopping. It’ll help you bargain with the dealer once you settle on a car. If the dealer can’t beat that amount, you can move on and consider another loan.
Please note that pre-approval is no guarantee. It doesn’t mean you’ve signed up for the loan. It simply means that you have an option – you can choose to apply for the loan or not. Furthermore, you’re not obligated to take out a loan for the full amount mentioned in the preapproval letter. If you find a car for a lower price, you can get a smaller loan.
What You Should NOT Do Before Applying for a Car Loan
One mistake you must avoid at all costs when applying for a car loan is overestimating your Equated Monthly Installments (EMI) affordability. A seemingly insignificant difference can increase the risk of EMI defaults when you’re faced with financial exigencies or income disruptions.
In the face of a default, you’ll have to pay hefty penalties. It could also negatively impact your credit score, thereby compromising your capability of securing a credit card or loan in the future.
So, how do you calculate your EMI affordability the right way?
You must deduct your fixed monthly expenses, insurance premiums, existing EMIs, and monthly investments from your income. Based on the amount you get, you should consider opting for the shortest tenure to reduce your interest cost.
Taking out a loan to purchase your favorite car is a feasible option. However, it requires some work. Determining your budget, analyzing your credit report, and shopping around for car loan terms may seem like a tall order, but you should do it regardless.
A little effort before applying for a car loan may help you save money in the long run. A few hours’ worth of effort today might translate into thousands of dollars in savings tomorrow.
For more information on what you need to do before applying for a car loan, feel free to reach out to our team at C1 Finance.