What is the Best Way to Shop for a Car Loan?
There are a lot of financial institutions that offer car financing, from large banks to fintechs and online lenders. The best car loan deal, however, depends on your lifestyle and financial position.
Before signing any contract, you should get a car loan pre-approval from several lenders to compare requirements, interest rates and terms.
First Things First, Get a Car Loan Pre-Approval
Many car loan experts recommend getting a car loan pre-approval before shopping around for cars. Doing this before walking into a dealership will put you in a favourable position during the car-buying process.
What Is It?
A car loan pre-approval involves the preliminary evaluation of your creditworthiness and capacity to repay a loan. Typically, this happens after filling out an online form or calling a lender’s hotline. A lending specialist reaches out to you to discuss your qualifications and, if qualified, how much you can borrow.
Why Is It Important?
When you get pre-approved for a car loan, you can estimate the amount of money you can borrow, as well as the possible interest rate and the ideal down payment you need to provide.
By having a better idea of your borrowing power, you can haggle for better deals on the negotiating table. You can also create a budget before you start shopping for cars.
2-Week Loan Shopping
While a car loan pre-approval helps you get better deals, it has a downside. Each time you apply for a pre-approval, the lending specialist typically pulls out your credit profiles from the credit reporting bureaus. This leaves an inquiry record on your credit profile, which negatively impacts your credit score. If you get too many recorded inquiries, the lenders will see you as a high risk borrower on the impression that you may have been declined by many lenders that’s why you keep applying.
However, multiple loan inquiries made within two weeks are counted as one. Thus, it is wise to do your pre-approval applications within this period.
How to Get Pre-Approved
Getting pre-approved for a car loan is easier than you think. The basic eligibility criteria usually include your credit profile and credit score, contact information and financial situation. If you get pre-approved, a lender will provide you with a pre-approval letter, which proves that you are creditworthy for an assumable loan and you have the available funding to cover the money you do not have.
Check your credit report for errors.
Lenders check your credit profile and credit score during the pre-approval process. They pay the credit bureaus to access your credit records to check your creditworthiness and predict your likelihood to make on-time payments. Each credit bureau may have compiled a different credit report for you, depending on the debt information they receive from your previous lenders.
If you have a stellar credit record and a good credit score, your pre-approval is quick—It usually wouldn’t take longer than 24 hours. A lender would only contact you for more information before making a decision if they find an issue in your credit records.
Review Your Credit Report First!
It is smart to check your credit reports first and ensure that all the pieces of information in your records are correct and updated before seeking a pre-approval. You can request a free copy of your credit report from the credit bureaus annually.
If you find any wrong information, submit a dispute letter to the credit bureau to have your issue investigated. If your dispute is successful, your credit profile will improve along with your credit score, increasing your chances of car loan approval.
Gather the necessary documents.
Apart from your credit record, lenders will also need your personal and financial information to verify your identity and match the car loan plans that are suitable for you.
These details generally include:
- Name
- Address (not post office box)
- Driver’s license, student ID, or passport
- Secondary identification like a Medicare card
- Social Security number
- Employment status
- Income
- Financial Information
Present your latest income tax return and most recent pay stubs and bank statements as proof of your capacity to repay the loan. If you are not employed but have an income that is sufficient enough to make an on-time only loan repayment, like rental or investment income, you need to present your business activity statements, a notice of assessment and other related documents.
Sometimes, your financial information is not required by a lender during the pre-approval stage, but this information will be needed during the approval stage.
Shopping for Car Loans
After the pre-approval, you can start shopping for your new car based on the estimated loanable amount you can borrow. Arm with your pre-approval letter, you can visit dealerships, look for the best car available and negotiate for a lower price. Do your car shopping within 30 to 60 days, as much as possible. Pre-approvals typically only last this long.
Alternatively, you can seek the help of a vehicle sourcing provider who can find your ideal car through its wide network of car dealers across Australia.
Trade-Ins and Down Payments
While it’s tempting to trade in your old car and roll your current loan into a new one, it may be smarter to sell your old vehicle and apply to use the profit as a down payment for your new car. Cars depreciate fast, especially luxury types. You could be owing owe more on your loan than it's worth in the long run.
Providing a large down payment, on the other hand, lowers your overall monthly car payment and helps you pay off your car loan for a shorter term, helping you avoid getting negative equity or being upside down on your loan.
Once you finally find the car that fits your budget and needs, it’s time to submit your formal loan application to the lender of your choice. Along with the information you provide during the pre-approval stage, you also need to provide specifics of the car that you want to buy, including the make, model, year, mileage and VIN.
Choosing the Best Deal from Multiple Offers
After getting pre-approved for a car loan, you may get several car financing offers from various lenders. At this stage, it’s wise to not take the first loan offer you get. Instead, compare the interest rate, terms and fees of each car finance deal.
Annual Percentage Rate
Choose a car loan with the lowest APR because it will translate into long-term savings. A $15,000 loan with a 5% APR that’s payable in 3 years, for instance, will give you an overall savings of almost $500 compared to the same loan at 7%.
The APR, which is higher than the interest rate, can give a good measure of your loan costs because it takes into account the mortgage fees.
Loan Terms
The length of a loan affects both the total cost of your loan and your monthly payment. While you may need to pay a higher monthly payment for a car loan with a shorter term, you will be paying less money overall. You will also reduce the length of time you can be underwater on your loan, as well as the length of time you build equity on the vehicle.
Get pre-approved for a car loan today! At Positive Lending Solutions, we offer a quick pre-approval that doesn’t an in-depth review of your financial situation. Call us now on 1300 722 210 or fill out the Quick Quote form.
See also:
Getting a Car Loan With a Balloon Payment? Here’s What You Should Know
How to Spot a Great Vehicle Sourcing Provider
Tom Caesar is the Managing Director of The Positive Group, a group of Australian financial services companies offering a broad range of finance to clients Australia wide. The Positive Group assist clients in the areas of car finance, mortgages, insurance & wealth management. Tom has been in car & asset finance for over 10 years. Tom regularly contributes articles on car finance, insurance, technology and business growth, drawing on his experience of starting his own brokerage in 2009.