Buying a car is one of the most significant investments Americans will ever make. Hence, before taking out a car loan, it's important to understand the whole credit process — from the impact of your credit score on your chances of securing a loan to the effect on your financial situation.
To get an auto loan with the best possible rate, you should assess your options in advance and know what to look for when comparing loan offers.
Read on to find out how to successfully pre-qualify for a car loan while keeping your finances stable.
If your debt-to-income ratio — Lenders look at the total amount of debt you have when applying for a vehicle loan, they will compare with your income to your monthly debt obligations. when your debt is below 40%, lenders will be more agreeable to give additional credit to the borrower.
Keeping an eye on your credit reports and overall credit health is important especially when you're planning on purchasing a car or home in the near future.
The credit score criteria vary depending on the lender's preferred scoring model. The most well-known model, FICO® Auto Score 8 has a score range between 250 and 900. A higher your credit score indicates to lenders the probability for a borrower to repay the loan. Banks and Credit Unions use credit score and history as a primary tool to determine risk.
In most cases the deeper you search the better loan deal you can secure.
Either on your own or through our Finance department here at Certified Autoplex, you can submit one application and we will forward it to multiple lenders to find the most suitable terms. Although hard inquiries will appear on your credit report every time you apply for credit from a lender. Limiting these applications to a shorter time period minimizes the number of hard inquiries as credit scoring models like FICO usually group such inquiries as one after you secure a loan from a lender — reducing their impact on credit reports.
You can acquire a loan from the following sources:
● Banks and Credit Unions: Loans from financial institutions are secured beforehand Hence, you know exactly how much the bank is requiring for a down payment and overall how much the loan and the vehicle will cost you.
● Car Dealers: Car dealership financing is often easier to qualify for as dealerships often allow you access to special deals and incentives provided to dealership customers. Another reason is that most dealerships have multiple lenders in their portfolio to work with and will be able to shop rates for you easily.
● Online Lenders: These loans work similarly to direct lending from banks. You can contact multiple lenders through online consolidating websites.
Pre Approval involves completing a preliminary application where your credit and financial details are reviewed. Accordingly, you are offered a loan amount and the respective interest rate. There is no obligation on you or the lender to actually enter into a loan agreement.
Pre Approval helps you in:
● finding the best interest rates,
● estimating your spending capacity
● and bargaining effectively with the dealership.
In return to the lender agreeing to provide the purchase amount for the vehicle, you agree to repay that principal with interest — over a set period of months. Till you repay the loan, the finance company retains true ownership of the vehicle.
Here are some important components of your loan agreement:
● Down Payment: This bulk cash amount you put up initially. The higher the down payment the less you need to borrow—in turn lowering the total amount of interest you will have to pay.
● APR (Annual Percentage Rate): The interest rate and lender charges make up the APR. Comparing APRs is a good way to assess the affordability of various loans.
● Taxes and Fees: Every state charges sales tax (6.25% in Dallas) on vehicles plus the registration fees. Usually, dealerships will charge a documentation fee to take care of registration for you. They may also charge a destination fee (delivery charges).
● Term: Usually the number of months to repay the loan are thirty-six or seventy-two. The longer the term, the larger the interest amount. Lenders offer better interest rates for shorter term lengths, and vice versa.
● Monthly Payment: The loan must be repaid by this amount— including the principal and the interest—every month by an agreed-upon date. Some people opt for a longer loan term to secure lower monthly payments.
If your credit report is less than satisfactory, consider taking the following steps to improve your credit rating:
● Obtaining a cosigner for your loan
● Making late payments or collection accounts current.
● Paying all your bills on time.
● Repaying existing debt to improve your credit utilization ratio — the total amount of credit you have available against how much you are using.
If you can’t wait long enough to improve your score, you still can apply for a car loan. However, your loan will likely have a much higher interest rate.
A large down payment offsets the impact of poor credit by reducing the amount you have to borrow—and hence, lowering the total amount of interest. Plus, lenders view your down payment as a positive indication for repayment.
Another option is to include a cosigner with a good credit record. The cosigner will share the burden of risk and responsibility—improving your loan agreement terms.
Payment history is crucial in determining credit scores. By paying your loan on time, you can build a decent credit history.
After loan repayment, the lender will report the completion to credit bureaus. It will continue to reflect positively on your credit report for the next ten years—showing future lenders your credit reliability.
Conversely, late or missed payments hurt your credit scores and chances of acquiring a loan in the future for at least seven years. Furthermore, missing payments may prompt the lender to send the loan to collections or even repossess the vehicle—also showing negatively on your report for seven years. Only after several years will their impact diminish.
When considering the cost of a car, also account for total monthly expenses — loan payments, insurance, gas, and maintenance. You also need to look at your other monthly debt obligations such as credit cards, student loans, and mortgages.
Always research the best car loan deals and go over all the terms and conditions before finalizing your loan decision. Then, be punctual in your payments to maintain a healthy credit score.
It will greatly help to assess your credit score and financial standing beforehand. Even if your credit score is low, you can improve your rating by repaying your dues.
Follow these steps and you will be ready to prequalify for a car loan in Dallas.