2. Set A Budget
Before financing a car, determine how much money you can afford to spend per month and overall to pay an auto loan off. It can be easy to forget the purchase price of your dream vehicle during the car-buying process, but be realistic about your budget.
Your annual percentage rate (APR), the interest rate on your auto loan plus any fees, will determine how much you pay to finance your car. Your APR depends on factors including your credit history, your loan term, and the amount you borrow. While new vehicles usually cost more than used vehicles, they typically come with lower APRs.
3. Get Together The Required Paperwork
When financing a car there are four main requirements:
- Proof of Identity: You will need to verify your identity with a government-issued ID which can include your passport, driver’s license, and birth certificate.
- Proof of Income: In order to ensure you can make payments on time, documents like recent pay stubs, current bank statements, a recent W-2 form, or other statements. If you are self-employed, the last two years of your tax returns can also be used for proof of income.
- Proof of Insurance: Like all auto loans or vehicle financing ventures you will need proof of the minimum required car insurance in your state. Getting this is typically easy, and you can call your car insurance company to get a binder to show you have the proper coverage.
- Proof of Residence: To show proof of residence, you may provide your driver’s license, utility bill statements, insurance bills, mortgage or lease statements, and bank or credit card statements.
In some situations, you may need additional information such as your social security number or vehicle purchase documents in order to finance a car. If you are financing a used car you’ll need the original title document before you can move forward with an auto loan.
4. Get Rates From Auto Lenders
Lenders may not offer the same APRs and loan terms when you’re financing a car, so compare rates from auto loan providers. There are plenty of vehicle financing options, from dealerships and banks to companies that specialize in auto loans.
When getting quotes from auto loan providers you must know the differences between being prequalified and preapproved when financing a car. Prequalification offers an estimate of your rate, but because potential lenders only do a soft credit check, the rate could change after you apply for a loan. Preapproval comes after a hard credit check and almost guarantees financing at the terms outlined in the preapproval offer.
Preapproval can lead to a slight decrease in your credit score, but it allows a serious shopper to calculate the monthly car payments for the life of the loan. FICO counts all hard credit checks relating to your car loan as a single inquiry for up to 45 days, so rate shopping won’t impact your credit more than once.
5. Pick The Best Auto Lender For You
Everyone has different needs when it comes to financing a car. While some may avoid auto lenders with higher interest rates, others would be satisfied with any provider that’s willing to finance their vehicle.
When choosing an auto lender, keep the following factors in mind:
- APR: The lower the APR listed in your contract’s disclosures, the less you’ll pay to borrow money.
- Term length: Your loan term can vary considerably in length. Having a long-term loan typically means you’ll pay less per month but more over the full amount of time.
- Down payment: Making a significant down payment can save you money on interest when financing a car. The minimum down payment–if any–is determined by each auto lender. You may be able to use the trade-in value of your old vehicle toward the down payment on a new vehicle.