What to Know Before You Apply for an Auto Loan
Information You’ll Need for the Application Process
- Your credit or FICO score
- W-2 or recent pay stub
- Government ID
- Proof of residence, often a driver’s license, utility bill or something similar
Good Interest Rates for Auto Loans
Average national rates are around 7 percent, although they can range from less than 1 to 36 percent.
How Lenders Determine your Rate
Lenders will consider the following factors when determining your rates:
- Bankruptcies in the past seven years
- Birth date
- Credit score
- Current employer
- Desired loan term
- Employment status
- Job titles
- Loan amount
- Total liquid assets
- Vehicle make, model and year
- What you could offer with a down payment
- When you started working
- Whether the car is new or used
- Yearly income pretax, plus any other income, such as alimony or child support
How to Compare Auto Loans
When choosing between auto loan types and providers, consider the following:
- Term length
- Penalties like prepayment or late payments
- Down payment requirements
- Application fee
- Customer service ratings
- Dependability and trustworthiness; refer to third-party ratings from BBB, Trustpilot and Moody’s, among others.
How to Apply
The first step in the application process is getting your preapproval. To get preapproved, you can start by choosing a lender to apply to. You can choose between:
- Wells Fargo
- Bank of America
- Credit unions:
- Navy Federal
- Alliant Credit Union
- Boeing Employees Credit Union
- Online lenders:
During the initial preapproval phase, lenders will run a soft credit pull, which won’t affect your credit score (unlike a hard credit pull). Meanwhile, hard credit pulls can lower your credit score by a few points because they indicate you’re applying for new credit. One or two hard credit pulls won’t affect your credit score significantly, but too many in a short period of time could lead to higher rates.
After your soft credit pull, you’ll learn some basic information like the chance of approval and likely interest rates. You shouldn’t apply unless you get preapproved. Continuing to apply with a formal loan application can lead to a hard credit pull, which will hurt your credit score.
Try to get preapproved with multiple lenders to see your best loan terms. Keep in mind that not all lenders offer preapproval and, sometimes, you have a specific car in mind to apply for preapproval.
Get Your Down Payment/Trade-in
You have two options for your lump-sum payment: a down payment or a vehicle trade-in.
If you’re going with a down payment, you’ll pay cash to the dealer/lender to cover a portion of the car’s cost. The higher your down payment, the less likely you are to default and the lower your rates/premiums will be.
If you’re trading in a vehicle instead of a down payment, you can exchange any valuable car in exchange for credit towards the price of the car. Trade-ins only work if you’ve already paid off loans on the car that you’re trading in. If you have negative equity (owe more on the car than what the trade-in offer is), you’ll need to pay the difference to the lender when you buy your car.
Be sure to check out trusted resources like Kelly Blue Book or Edmunds Car Value to determine the value of your car for a trade-in. If you’re using an online value index, you’ll need to input your:
- Vehicle identification number
- License plate
- ZIP code10