Ultimate guide on how to get approved for a car loan

Buying your first or next car is a big and expensive decision, so it’s important to be prepared. Insight into how to get approved for a car loan is the first step in increasing your chances of qualifying for your dream car. 

Other than working on your credit scores, several factors can help you. That said, we walk you through the steps you can take to succeed in your auto loan application.

1. Make sure you have a good credit score

Having a good credit score makes you a more attractive borrower to lenders. So, before applying, ensure you have good credit to receive favorable rates and terms. 

FICO	Vantage Score
Exceptional: 800-850 Very good: 740-799 Good: 670-739 Fair: 580-669 Poor: 300-579	Excellent: 781-850 Good: 661-780 Fair: 601-660 Poor: 500-600 Very poor: 300-499

 

Remember, every lender has its own criteria when determining what a good credit score is. Still, they often favor scores in the good to excellent ranges. A good credit score shows that you’re responsible and that you can manage your debts. So, lenders are confident in offering credit to you. 

That said, targeting these ranges may improve your chances of getting approved for a car loan. To maintain a good credit score, try your best to make on-time payments, keep your credit utilization low, and avoid excessive credit inquiries.

2. Work on your credit before applying

Working on your credit before applying for any loan can benefit you in multiple ways. Lenders take into account your credit history and score, so strengthening your credit profile is crucial.

Check your credit report

Before anything else, get a copy of your credit report from the major credit bureaus, Equifax, Experian, or TransUnion. Check it then for any mistakes that may negatively impact your score. If you find any inaccuracies, dispute them right away. Other than ensuring your credit report is accurate, this may help lift your score.

Make on-time payments

Another thing you can try is paying your bills on time. Your payment history usually makes up 35% of your credit score. With that in mind, late payments significantly harm your credit. So, make it a priority to make consistent timely payments – whether it be credit cards, utility bills, and any other outstanding balances.

Lower your credit utilization

Reducing your credit balances can also positively affect your credit score. Try to keep your credit utilization below 30% of your credit limit. If possible, pay down any debts you can or avoid new debts to lower your credit utilization ratio.

3. Have a steady income and employment

Besides your credit score, your income and employment also play important roles in your chances of getting a car loan. Lenders assess your financial stability to determine if you have sufficient income to comfortably cover your loan. 

Because of this, having a stable source of income can help give your loan application a leg up. Showing lenders you have a steady income and employment can indicate that you have the ability to repay the auto loan.

Depending on the lender and your employment, you may need to provide certain documentation. Some of these may include your recent pay stubs, bank statements, and a W-2. But if you’re self-employed, lenders may ask for your tax returns or any proof of income.

4. Put down a down payment

A down payment is the money you give to a dealer to cover a portion of the vehicle’s price. It shows lenders that you’re a serious buyer and reduces the risk they take. 

More than that, when you put down a substantial amount, it decreases the amount you need to borrow. So, a down payment can help lower your monthly payments and overall interest. Lenders may also provide better rates or be more lenient with credit requirements depending on your down payment. 

Try to set aside at least 10% to 20% of the vehicle’s purchase price for your down payment. Through this, you can have more control over your loan terms. Make sure you also understand the terms and conditions as some lenders may have certain down payment requirements. 

5. Get pre-approved for a loan

Getting pre-approved for a car loan furthers your chances of securing an auto loan. Keep in mind though that prequalification and preapproval are two different things. 

• Prequalification only gives a general estimate of the rates you may qualify for. It also doesn’t affect your credit score because lenders may only do a soft credit check.
• Preapproval shows what a bank, credit union, or lender may likely offer. Unlike prequalification, getting preapproved may slightly ding your credit score because it involves a hard credit check. 

With pre-approval, you can have a clearer picture of your options and rates. So, it’s a powerful tool that can help you negotiate the terms with lenders or dealers.

6. Consider the types of lenders

Just as shopping for the perfect car, it’s also necessary to consider where to get your car loan. Different types of lenders offer different rates and requirements. So, understanding your options helps you decide which one may offer you a better auto loan.

Banks

Whether small or large, many banks provide car loans. Banks typically offer competitive rates and a straightforward application process. However, they tend to have stricter requirements. Meaning you may need to meet higher credit scores to qualify for a car loan from a bank. 

Credit unions

Credit unions are not-for-profit institutions, so they potentially offer lower interest rates and fees. Aside from those, they usually have a more lenient requirement when it comes to credit scores compared to traditional banks. So, this may increase your chances of qualifying for a car loan even with poor credit.

But usually, to avail of any loan from a credit union, you need to become a member. This involves satisfying the membership criteria. 

Online lenders

Since online lenders use digital platforms, they are commonly popular for borrowers looking for convenience and accessibility. On top of that, online lenders often have more flexible lending requirements. For this, online lenders are attractive options if you have less-than-perfect credit. But if you have a poor credit score, online lenders may charge higher interest rates and fees than credit unions. 

Car dealerships

Car dealerships sometimes provide in-house financing options, too. These loans, often called dealer financing, allow you to complete both your car purchase and loan application at the dealership. While this is a convenient option, it usually comes with high interest rates and fees. You may also be pressured to buy unwanted add-ons during the process. 

Exploring these various options can guide you to the right lender for your circumstance. Moreover, you can compare interest rates, repayment terms, and additional fees to find the car loan that matches your needs.

What credit score is needed for a car loan?

A good credit score highly affects your car loan application. Though minimum credit score requirements still vary per lender, a higher score may further improve your chances.

If your credit score is not good enough, you may still potentially get approved – you just need to find the right lender and loan. If you find yourself in this situation, you may consider getting a bad credit car loan instead. 

How to get a car loan with bad credit

Getting approved for an auto loan with bad credit may seem challenging, but don’t let it discourage you. Some lenders specialize in bad credit car loans, so they may be more willing to work with you. Though they have flexible credit requirements, they often charge higher interest rates and fees. Because of that, building your credit may be more efficient so that you avoid more costs and qualify for better loans. 

Conclusion

All lenders have their own requirements, so it’s important to compare and prepare before applying. Doing things like building your credit, saving for a down payment, and getting preapproved can give your application a step up. Through these, you may lift your chances of qualifying for a car loan with better rates and terms. And in the end, you can have an easier car-buying process and save more over the life of your loan. 

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