What documents are needed for a car loan?

Whether you’re a first-time buyer or a seasoned pro, insight into what documents are needed for a car loan can save you time. From your address to down payment, preparing the necessary paperwork ahead allows you to get a new set of wheels faster. 

Before you hit the road, here’s a checklist of the car loan documentation you need to accelerate your application. 

Car loan documentation checklist

When you take out an auto loan, lenders ask for certain documents before processing your application. Though the requirements vary based on your situation and lender, you usually need your: 

1. Proof of identity

Like with any other loan, lenders check your identity when you apply for a car loan. This helps them confirm if you are eligible and if you are who you say you are. In most cases, you may show any government-issued identification – driver’s license, birth certificate, passport, or other state-issued ID. 

2. Proof of address

Along with your identity, banks, credit unions, and dealerships also verify your residence. If your valid driver’s license matches your current address on your credit report, some lenders may find it sufficient enough. But usually, acceptable proof of residence includes utility bills, mortgage statements, lease or rental agreements, bank or credit card statements, property tax receipts, etc. 

3. Proof of income and employment

For lenders to be confident in extending you a car loan, you also need to prove your capability to pay it back. That said, you need to show you have a steady job and a reliable source of income.

Lenders typically require documents, like your W-2s, 1099s, and tax returns. You may also need to prepare copies of your pay stubs and bank statements for the last 6 months to show how much you earn. Sometimes, lenders ask for your employer’s contact details to verify your employment status, too. 

Though if you are self-employed, lenders usually need your tax returns and bank statements. Commonly, you may need to prepare your tax returns from the past 2 years.

Beyond your income and employment, lenders may also assess your monthly expenses and assets, like real estate, stocks, bonds, investment accounts, etc. These can also help you provide a strong case that you can afford your loan and meet your monthly payments. 

4. Credit history

When you apply for a car loan, lenders ask for your name, address, date of birth, and Social Security number. These details allow them to pull your credit profile. 

Lenders check your credit report to assess your financial situation based on your credit history. Through this, they view your account types, credit limits, outstanding balances, and payment history. Your credit history then gives insight into how likely you are to stay current on your loan payments.

Aside from that, they review your credit score to measure your risk as a borrower. A higher score mainly means better credit. Though keep in mind that lenders use different credit scoring models, like FICO auto scores. 

They also consider your debt-to-income (DTI) ratio. This ratio is calculated by dividing your monthly payments by your gross monthly income. In general, a low debt-to-income ratio shows lenders you can manage to pay your loan on top of your other bills. Meaning a high DTI ratio suggests the opposite – you struggle with your current financial obligations.

5. Vehicle information

If you work with a dealership, they handle your car loan from start to end. So, the dealer provides the vehicle information to your lender. 

But if you apply directly to a lender or buy from a private seller, you usually need to provide the vehicle information. This means you need the bill of sale (purchase agreement) or buyer’s order. These then typically contain the following: 

• Purchase price
• Vehicle identification number (VIN)
• The car’s make, model, year
• Additional details, like mileage and add-ons
• Any associated fees

In case you buy a used car, you should get similar information above from the seller. Other than those, you also need to provide the original title and any liens on the car.

6. Proof of insurance

Lenders require proof of insurance before you get to drive down the road. Generally, liability insurance is mandatory in most states. Aside from protecting you, this insurance also protects lenders. This commonly covers medical, legal, and damage costs related to any car accidents you cause.

And depending on your state laws and lender, you may also be required to have collision and comprehensive coverage. Your proof of insurance should mainly include your name, insurance company, NAIC number, and policy number. In case you have existing auto insurance, contact your insurance company to verify if this may cover your new car. 

If you don’t have insurance yet, shop around and compare different quotes. This can help you find the one that aligns with your situation the best. But ensure that your insurance satisfies both requirements from your state and lender. 

7. Down payment

Having a clear plan for your down payment can also speed up your car loan application. The down payment is the upfront money that covers a portion of your vehicle’s price. While no-money-down loans are possible, consider saving at least 10% to 20% of the purchase price for your down payment. 

Since a down payment reduces the risk lenders take, putting down a large sum can lift your chances of getting approved. Lenders may also offer you more favorable rates or be more flexible with credit requirements. Plus, a down payment reduces the amount you need to borrow. So, this decreases your monthly payments and total interest charges. 

Payment methods can vary, but usually, you may do it through cash, personal checks, and credit and debit cards. In some cases, you may also take out a personal loan for your down payment. Yet, remember that a personal loan on top of a car loan affects your chances, how much you can borrow, and overall loan terms. 

8. Trade-in documentation

If you plan to trade in your current vehicle, you need to prepare its title and registration documents to prove you own the car. Depending on your lender, you may also need odometer and damage disclosure statements. Trading in your vehicle means the dealer subtracts the trade-in amount from the amount of the new car.

But before trading in your existing car, make sure you know its current value. This helps you avoid low offers and allows you to negotiate the trade-in amount. 

It’s also important to confirm if you still owe anything on your current vehicle. If your outstanding balance is more than the car’s worth, this means you have negative equity or are upside down on the loan. If this happens, the dealer pays off your original loan. Then, you can either pay them the difference or have it roll over to your new auto loan.

How to get approved for a car loan

Applying for auto loans doesn’t have to be hard. If you meet your lender’s criteria, getting approved can come easily. 

Satisfy the credit requirements

Auto lenders set different credit standards. Still, having a high credit score suggests that you can pay back the loan, so lenders consider you a good credit risk. That said, check your credit score and the credit requirements of each financial institution. 

Say your credit score is 810 – this may give you access to lenders’ best car loan rates and terms. On the other hand, if your score is around 400, this can limit your choices or make it harder to get a loan. 

If you want to increase your score, get a copy of your credit report from the three major credit bureaus (Equifax, Experian, or TransUnion). Your credit report can give you an idea of areas for improvement. Note that your payment history makes up 35% of your credit score. So, prioritizing timely payments can help you significantly boost your score. 

Lowering your credit balances positively affects your credit score, too. With this in mind, pay down any outstanding balances you can or avoid acquiring new debts to lower your credit utilization ratio.

Get pre-approved for a loan

You can also have more chances of approval if you get pre-approved for a car loan. Preapproval shows what lenders are likely to offer you and the terms you may get. Since they conduct hard credit checks to determine your creditworthiness, preapproval can temporarily ding your credit score. 

With car loan pre-approval, you can have a clearer idea of the rates and offers you potentially qualify for. This, in turn, can support you in negotiations with lenders and dealers. 

Summary

Preparing the necessary documentation helps pick up the pace of your auto loan application. Beyond that, this also shows you’re ready, willing, and able to meet your repayments and lifts your chances of securing ideal rates and terms. So, gather your proof of identity, income, insurance, and vehicle information to lock in your dream car.

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