If you’re thinking you’ll just get financing at the dealership when you buy your car, you’re setting yourself up to pay too much. How will you know it’s a good deal if you have no frame of reference against which to judge the offer?
You’ll be much better off with a pre-approved loan in hand.
In addition to feeling more confident about the process, you’ll have a bargaining chip to get you a better deal when you’re at the dealership.
Here’s how to shop for a car loan.
1. Start with Your Budget
The first thing you need to do is figure out how much you can afford to pay for your new car. Make a list of all your recurring monthly expenses, as well as savings and investment deposits. Be sure to apportion dollars for entertainment and other pleasures.
Subtract that figure from your monthly income to get a rough idea of the monthly payment you can afford. Whatever you come up with, try to keep the number to 20 percent or less of your total income. Keep in mind; this needs to include fuel, insurance, taxes, and maintenance.
Now, with that said, don’t feel like you have to buy the most expensive car you can comfortably afford. This exercise is just to help you get an idea of what you can buy. If you can be happier with a less expensive model, that will be much better for your finances. You should also be prepared to make a down payment of at least 20 percent of the purchase price of the car.
2. Get a Handle on Your Credit Score
Ideally, you’re in the habit of getting a free copy of your credit report each year. If so, you probably already know your score. If not, get the report and find out.
This will help you research the interest rate for which you qualify. The higher your score, the lower the rate. As of this writing, borrowers with scores above 700 can get loans in the four percent APR range.
You can then use a car loans calculator to determine what you can really afford. Lacking this knowledge, you might have signed up for a more expensive loan.
3. Gather Supporting Financial Documentation
In most cases, you’ll need to show payroll stubs to confirm your income. You might also be asked to show W2s, 1099s and/or your tax documents if you are self-employed. In most cases, this only comes into play if your credit score is marginal. Still, it’s good to have this information at your fingertips to avoid delays.
4. Seek Pre-Approval
Start with the bank or credit union with which you do business. Another competitive source of financing is online lenders like RoadLoans. Approaching it this way, you can find out what interest rates are offered based upon your credit score — before you file an application.
On that note, it’s important to keep your loan-shopping activity within the time frame of a couple of weeks to avoid inadvertently diminishing your credit score. Credit agencies treat applications of the same type coming in over a one- or two-week period as a single inquiry because they know you’re shopping for the best loan.
Once you have the pre-approval in hand, you’re ready to look for your car.
If you shop for a car loan based upon this advice, you’ll save yourself a lot of time, anxiety and money. You’ll also be better positioned to negotiate the price of your purchase, as you can base your discussions on the actual price of the car, rather than the monthly payment.