Buying a car can typically be a headache. Now imagine you have bad credit. How’s that headache now? Knowing how to qualify for a car loan can mean the difference between losing big bucks and saving your hard-earned cash.
Car Loan Requirements
No matter what your credit condition, you need a few things if you plan on qualifying for a car loan. So what do you need to finance a car?
1. Proof of Income. This is an absolute must. Lenders will want to know you are a reliable bet, and therefore have a steady income. Use paystubs or an employer reference to verify you have a regular income stream.
You can also put up other assets or collateral to get the loan. Credit cards or home mortgages may also suffice.
2. Proof of Insurance. Protection coverage will be required if you hope to secure a qualified car loan. This can be done as you prepare to purchase the vehicle, but it may be in your best interest to obtain insurance ahead of time.
3. Proof of Residence. Just in case you stop making your payments, lenders are going to want to know where to find you. Utility bills and other forms of official mail can help verify where you live.
4. Proof of Identity. This is especially important if you are working with a bank or other lending institution for the first time. Proving your identity will also determine your credit score.
Photo ID with your signature, utility bills with your address listed, and banking statements may serve as proof you are who you say you are.
How to Qualify for a Car Loan
It pays to do your homework. Literally. Do your research by shopping for quotes from banks, credit unions, online lenders, and dealerships themselves. Research shows these different institutions can charge different interest rates, meaning you could save a great deal.
A first step in how to qualify for a car loan involves checking your credit. It is helpful to have a FICO score considered good, or 700 or above. If your score is below this you may want to consider improving it before buying a car.
Past-due payments, high credit card balances, and defaulting on other loans are just a few ways that your credit is brought down. You can pay down your credit card and be prompt in paying your bills as a way to help elevate that credit score.
If you don’t have time to repair a credit score below this rating, not to worry. Some lenders specialize in high-risk bad credit car loans. You will have to pay a higher monthly interest rate, but there are some steps you can take to help with this.
Qualifying for a car loan, regardless of the lending institution, will be made easier if you can put down a hefty down payment. A larger sum of money from you means you’re a more trustworthy risk.
Don’t have a lot of money to put down? You can always trade in a current vehicle. Make sure you have that vehicle’s title and registration for proof. Additionally, you will want to make sure there is no “negative equity” in the vehicle. This means what you still owe on that vehicle is greater than the trade-in value.
Prequalifying for a Car Loan
When shopping for your next vehicle, you can check to see if you prequalify. This is not a formal loan agreement. Instead a prequalification verifies that should you apply, you are likely to get approved.
This is advantageous since you can use it to negotiate. Receive a preapproval from an online lender and you can take that to a dealer and ask if they can beat those terms. Either they can, reducing your payments or interest rate, or they can’t and you go with the online lender. Win win!
Preapprovals are also helpful as they do not negatively affect your credit score. Formal checks or “hard inquiries” are when lenders look at your credit score for the purposes of evaluating whether or not to give you a loan. Too many inquiries of this kind can bring your score down.
With preapprovals of car loans, “soft inquiries” do not lower your credit score. This means you can spend more time researching which option is best. Check different interest rates, monthly payment amounts, and length of loan terms.
Getting the Most Out of Your Loan
Car loans have been found to offer better terms than other types of loans. Personal loans, for example, can have twice the interest rate of a car loan. This is in part because the car loans include the vehicle itself as collateral should you be unable to make payments.
So it pays to make the most of your qualified car loan. The helpful staff at Bonsai Finance are ready to help make this happen.
If you decide to go with a dealer to finance your qualified car loan, be sure you understand the terms. Do not agree to monthly payments you can’t afford or a long term you cannot commit to.
Dealers get different quotes from lenders when considering your car loan. Be sure to ask to see a variety instead of just the one they offer you. Again, it pays to be informed.
You could also make the most of your loan situation by partnering with a cosigner. If your bad credit is preventing you from receiving otherwise good terms, you can ask someone with good credit for help.
Using this cosigner’s credit will reduce interest rates and monthly payments, but tread carefully. If you fall into trouble and cannot make your payments, this person is also responsible. You wouldn’t want to jeopardize someone else’s credit score.
Don’t worry, having bad credit is not the end of your financial world. Be sure to shop around for your best option and not bite off more than you can chew with monthly payment amounts, interest rates, and loan term length. Understanding how to qualify for a car loan with bad credit takes some work and research, but it also means more cash left in your bank account.