A Simple Process to Start Your Car Loan Search
If you are looking to get a car loan, there are some things you need to be aware of before you being your search. A car loan is when you borrow money from a lending institution, such as a bank, credit union, or third party lender.
You will use these funds to finance all or part of your car purchase, with the funds having to be paid back with interest across a fixed time period. These days, there are many online lenders that allow you to quickly and safely get a car loan without having to fill out a physical form or go to a physical location.
There are numerous steps involved with searching for the best car loan rates. Here is a quick look at the step-by-step process that you will usually need to consider.
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Getting Started
The initial steps of finding the best lender for you to get a car loan. There are different types of institutions that will provide loans to people who are looking to finance a car purchase. The most traditional way is to deal with a bank or credit union.
The latter will often have more flexible rates and terms. There are also now online-only lenders that are providing to be very popular. Once you do your research and find a reputable offering, you can conventionally get your hands on a car loan in no time at all.
Pre-Qualification
If you want to get an idea as to what size loan you can get and the corresponding rate of interest and repayment terms, you can look at pre-qualifying for a car loan. You can often complete these step with online lenders without having to commit to a hard credit check.
Therefore, you will not be hurting your credit score at this point. You will be asked for basic information at this point, such as personal information, contact details, employment details, as well as your monthly debt obligations.
Begin Shopping Around
As soon as you have a rough idea as to what you can expect when getting a car loan, you can begin your search for the best lender. It is a good idea to compare rates on an objective level, as well as seeing what the monthly payments will look like, as well as any fees that need to be paid.
Reading the Fine Print
It is always important that you take the time to read the terms and conditions of a car loan to make sure that you are fully aware of what you are committing to. If a car loan offering seems to be too good to be true, then it usually will be. There might be low-interest rates offered by a particular lender, but there are all sorts of fees that you will come across under the surface that will cause issues.
After Applying
After you have submitted your application to a given lender for a car loan, you will then have to wait to see if your request gets approved. The approval time varies from lender to lender. Sometimes, this can be just 24 hours, while other times it might be a week or longer. You will usually be given a timeline after applying as to when you will hear if your application has been successful or not.
Important Terms to Be Aware of:
Prepayment Penalties: This is a fee that you will have to pay if you are trying to pay back the loan earlier than was initially planned.
Origination Fee: Some lenders will charge an upfront fee for processing a full loan application and this will normally be a percentage of the total loan amount.
APR: The Annual Percentage Rate (APR) is going to be the total interest rate you will be paid across a year. This includes all of the different fees attached to a loan, so it gives you an objective way to compare rates offered by different lenders.
Late Fees: These are the charges you are going to have to pay if you miss a payment or are late. There will often be a grace period in place, but after a certain point, you will need to pay some sort of a fee.
Things Necessary to Begin
There are a few different things that you should have in order before you apply for a car loan. This allows you to be as prepared as possible for the entire process.
Credit Score
When applying for most types of loans, the lender will take a look at your credit score. This showcases your track record of paying back debt on time and can dictate how much you are able to borrow and at what rate. Naturally, the bigger your credit score, the better. There are numerous useful resources that allow you to get your hands on a free credit report to take a look are your own situation.
Loan Purpose and Amount
You are going to be asked exactly how much you are looking to borrow and what the money will be used for. As you are looking for a car loan, they may want to know what make, model, and year vehicle that you are looking to buy. They also want to know how much is going to be in the form of borrowings and how much of the car’s price you will be paying in cash.
Repayment Terms
There will be a fixed period of time in place for a car loan. This could start at one year and go up to or bypass 60 months. For longer time periods, the regular repayments will be lower but you will be paying more interest over the lifetime of the loan.
Documents and Details
There is all of the standard personal information that you need to provide when trying to get a car loan. However, you will usually need to verify your information by providing the likes of bank statements, employment information, and personal identification.
Figuring Out Affordability
You should calculate how much you can afford to repeat on a monthly basis. There are useful calculators that help you in this regard and you will quickly get a good idea as to what lender will offer the best terms for your situation.
Things to Know
There are different terms that you will come across when searching for a car loan that you might not be very familiar with. Here is a look at some common terminology that you should be aware of:
Secured Loan: A secured loan is one that has some sort of collateral on the line. In the form of a car loan, this means that the car itself may be used as collateral in case you fail to meet your repayment obligations. An unsecured loan will not have any form of collateral.
Fixed Rate: The majority of car loans are going to be fixed rate, so your interest rate on your debt will not change during the lifetime of your loan. A variable rate on the other hand will change depending on the current market rates, making it more unpredictable.
Co-Signer: If you add a co-signer to your car loan, this means that you will be sharing the burden of the debt with someone else. If your co-signer has a better credit score, then you can often borrow more or get a better rate.
Direct Lender: A direct lender is when a lender directly provides a car loan to the borrower.
Marketplace Lender: A marketplace lender is a platform that will offer you a collection of car loans from different lenders, within the given network.
Comparing the Different Options
Now you have a good grasp of what you need to be looking out for when it comes to car loans, you will be able to determine which lenders appear to fit your needs the best. You should take a look at what your monthly payments are going to be when it come sot the various lenders. This includes assessing the rates and fees that are associated with each of the offerings.
The APR is going to be your leading light as this gives you a fully objective comparison tool for the various offerings. The rates and loan sizes will also depend on your credit score, as well as your income and debt to income ratio. Therefore, you will see that some lenders will be more willing to deal with people who are not as good in this regard, while others are very strict with their rules and requirements. Some lenders will even specialize in providing loans to people who have poor credit scores.
Online Lenders vs Traditional Lenders
There is a great range of options open to people today when they are trying to get a car loan. While in the past, you had to rely on traditional lenders like banks, you now can consider exciting online lenders. Here are the strengths and weaknesses of these two different types of lenders:
Traditional Lenders – Pros
- Very safe and secure
- Often have the ability to conduct in-person banking
- Existing customers can get access to more funds
- Existing customers can often get more competitive rates
Traditional Lenders – Cons
- Stricter qualifications
- Interest rates and terms can be more limited
- Application and approval process usually slower
Online lenders – Pros
- Quick and easy application and approval process
- Pre-qualification is possible
- Easy and quick comparison of different lenders
- Qualifications not as strict
- Offers a wide range of loan types
Online Lenders – Cons
- Some sites might not be reputable
- Existing bank customers may get preferable terms
- Can’t always speak to someone in person
The trust factor is the main reason why some people stick to traditional lenders like banks. This is why if you are going with an online lender, you need to conduct proper due diligence before making a commitment to the lender.
FAQs
What can I use a car loan for?
With a car loan, you are going to use this for car-related expenses. This usually means buying a new car, but some people may need a car loan if significant repairs are needed for a vehicle.
Who can qualify for a car loan?
You will need to meet the qualification requirements of a lender and be committed to using the funds for car-related purposes.
Will it hurt my credit score by applying for a car loan?
If you pre-qualify for a car loan, there will only be a soft credit check carried out. If you commit to the application process further down the line, then a hard credit check will be necessary usually, which will have an impact on your credit score.
What info is necessary when applying?
There will be the standard types of personal information, contact details, employment information, and photo identification needed during the application process.
How much can I borrow and for what term?
This depends on numerous factors, including the lender’s rules, your credit score, and your debt to income ratio. Most lenders will have a minimum and maximum loan amount and fixed terms no offer.
Conclusion
Car loans can be a useful way for you to fund a new car purchase. There are many different lenders in the space today, allowing you to get your hands on competitive rates and favorable terms. Whether you go for a traditional lender or an online-focused lender, there are pros and cons associated with both of these options. The process of using an online lender is often a lot quicker and easier. while traditional lenders have more of a trust factor for borrowers a lot of the time.
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