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  • What Consumers Need to Know About Applying for Auto Loans

    Published on October 16, 2021

    Auto buyers may not have the funds to purchase a reliable vehicle without a loan. Auto loans help many buyers fulfill their dream of buying a new car, and some are not able to borrow the needed funds through a traditional lender. Non-traditional lenders could give them fast access to financing and help buyers get better transportation without facing a higher monthly cost. 

    The lenders can provide a loan according to the borrower’s needs and provide information such as the highest loan amount available. Lenders can help borrowers get a loan quickly and offer a better way to improve the borrower’s credit rating. 

    Assessing Their Credit Scores

    Borrowers should review their credit scores before attempting to get an auto loan. The credit scores will affect if they can get a loan, and if they are approved with lower credit scores, the interest rate for the loan could be higher than average.

    If borrowers review their credit history, they know where they stand. Many borrowers choose to eliminate negative listings and smaller debts to increase their credit scores. If the borrower has improved their credit scores, it is time to apply for an auto loan now. 

    Review Debt to Income Ratios

    Debt-to-income ratios determine if the borrower can afford to buy a car. Lenders review how much debt the borrower has and compare it to their monthly income. The ratio must determine that the borrower can afford the car based on what they pay each month. If potential borrowers can afford their current monthly obligations plus the car loan and insurance, they will be approved for the auto loan. 

    How Much Can They Pay Down

    Most auto borrowers must pay a down payment when borrowing money to buy a car. However, if they have excellent credit, some lenders won’t require the down payment. The average auto buyer could pay as much as 10% or more down to get an auto loan. Non-traditional lenders won’t require a down payment for the loan, and this could be a better solution for buyers who don’t have perfect credit. 

    Get a Preapproval for an Auto Loan

    The preapproval shows the borrower exactly how much they can borrow to purchase a car, and this could help them establish a budget for their purchase. Once they know how much they can borrow, the buyer will know what car they can purchase with the loan. 

    When they apply for a loan, traditional borrowers look for specific credit scores. On the application, the prospective borrower fills in how much they want to borrow. A non-traditional lender won’t review the credit scores. Instead, they review the borrower’s income and determine the highest loan amount. 

    Review Each Payment Plan

    The payment plan defines how much the buyer pays each month, and they can choose from several payment plans. The length of the loan determines how low the monthly payments are. When reviewing their selections, the auto buyers must determine what is most affordable for them without choosing a plan where they pay far more than the original price of the automobile plus the interest. 

    Most auto lenders won’t finance the automobile for more than five years for this reason, and the lenders prevent borrowers from overpaying for their new vehicle. If the borrower needs to refinance the loan later, they may have the option if they pay all their payments on time. 

    Do They Have a Safe Driving Record?

    A clean driving record could help borrowers save on auto insurance. If the auto buyer has a long history of safe driving, they are more likely to be quoted affordable auto insurance premiums. All drivers who are over the age of 25 can get better rates, too. When preparing to buy a car, the buyer should consider ways to reduce their premiums. 

    By improving their credit scores, borrowers will also pay less for the insurance. The auto buyer may also get more discounts if they add more than one automobile to their policy or by opting for an umbrella policy. 

    What Insurance Will They Need?

    All auto owners who finance an automobile must purchase comprehensive and collision coverage for the car. They may need proof of their insurance coverage when they get the auto loan. The terms of the auto loan contract stipulate that the buyer must purchase and maintain these policies until they pay off their auto loan. If they don’t, the lender could repossess their vehicle. 

    The insurance is not just for the buyer, it also protects the lender’s investment. If the buyer is involved in an accident, the insurance will provide funds to repair the automobile. If the vehicle is a total loss, the insurance provides the current market value of the car. 

    Payment Options and Early Payouts

    Auto borrowers have several options for submitting their monthly auto loan payments. They can use a debit card, check, or money order to send in their payment. The buyer has the option to set up automatic payments that are deducted directly from their checking account. 

    If the borrower wants to pay off the loan faster, they can request an early payoff. The payout amount is the current payoff without the extra interest, and they could pay far less overall. It will not count against them if they pay off the loan faster and will not affect the borrower’s credit scores negatively.  

    When buying a car, many auto buyers won’t have the money to purchase the automobile available. They will need to apply for a loan through their preferred lender. When trying to get a loan, it is recommended that potential buyers evaluate their credit and ensure they have adequate credit scores to be approved. If they have a high debt volume, the borrower may need to pay off some of their debts first. 

    Buyers should apply for the loan to get a preapproval to establish their budget. This helps them determine what car they can afford. By applying for an auto loan, the borrower could get approved quickly and have the funds available within a few days.