So youíre ready to buy a new or used car, but you need an auto loan. Should you finance with the dealer or through a third party? How does the application process work? What happens if you canít get pre approved? In this article, we will answer these questions and help prepare you for the auto loan process.
Dealers or Third Party Lender?
Typically, you can get a better rate financing through dealerships. They have vested interest in getting your business and moving vehicles off their lots. Regardless, it is worthwhile to compare rates with the automakerís Captive Lending Companies, such as the financial arms of Honda, Toyota, Volkswagen, etc.,to make sure the dealer is offering you the best rate.
A number of online lenders now also offer auto loans. Some may offer lower interest rates and be more willing to work with drivers with poor credit. However, many online lenders may be unfamiliar entities so we highly recommend doing your due diligence before obtaining a loan from any online lender. Research their customer service history, their standing with the Better Business Bureau
and the Consumer Financial Protection Bureau
. You want to make sure no complaints have been lodged against the company.
Tips for Comparing Quotes
If you do end up comparing loans from multiple lenders, ask if they are running a hard or soft credit check. According to Credit Karma
, hard checks from multiple lenders, if done in a 14-45 day window, will usually show up as just one hard credit check. Pre-approvals are generally only offered for a certain amount of time, so make sure you read the fine print.
After you have done your due diligence, choose only one lender to apply to avoid credit inquiries. If lenders see credit inquiries from competing lenders, they assume you were rejected by them all and it makes them look negatively on your application.MORE >> CreditKarma delves into the pros and cons of online lenders. Experian explains soft versus soft credit checks and their impacts to your credit score.
How It Works: Steps to Applying for a Pre-Approved Auto Loan
Pre-approved auto loans are highly conditional. Lenders have set policies on how much they will loan on new and used cars. For example, when buying a used vehicle, there may be restrictions on how old a vehicle is or how many miles are on it. Lenders may not loan more than MSRP on new vehicles, and Kelley Blue Book retail for used vehicles.
What Youíll Need
To apply for a pre-approved auto loan, youíll need the following information:
- Obtain and verify your credit score:
- Lenders will do this as well but you want to make sure the information is correct.
- Provide financial and employment data:
- Social Security Number
- Drivers License or State ID
- Employment status
- Income (Tax Return, Pay Stubs)
- Proof of Residence
What To Do If You Canít Get Pre-Approved
There can be a number of reasons you arenít pre-approved for a loan, but it can be particularly difficult for those with credit issues. Thatís not to say loans arenít available for those with poor credit, but they will almost certainly be at a higher interest rates since theyíre seen as a riskier investment.
If you canít get pre-approved, or obtain a loan from an automakerís Captive Finance Arm, consider getting a co-signer. However, this should be approached with caution. MORE >> Steps to rebuilding your credit. Learn more about the Dangers of Co-Signing an Auto Loan.
Getting pre-approved for an auto loan is more of a challenge for some than others, but if you can get pre-approved it will help you in the car buying process. Dealers will take you seriously from the start if they know you have pre-arranged a loan. Often, dealerships can get what is called a rate concession
. The dealer calls their captive finance company and asks them to beat your pre-approved interest rate. You want the best possible rate, if the dealership can get it for you, go with them.