Applying for a Car Loan: A Step-by-Step Guide

Obtaining a car loan is a relatively painless process. You can arm yourself with knowledge in order to get the best possible deal, and no matter what car you intend to buy, it's always wise to shop around to find the most competitive lender.

Step One: Be Patient

Buying a car is a process, not necessarily something you should try to squeeze into a Saturday afternoon. Spend time doing research about what kind of car you want to buy. When you are ready to shift from the shopping phase to the buying phase, arm yourself with information about the value of the particular types of cars you are interested in as well as your own credit rating. Knowing your credit rating can help you be prepared to negotiate. You can request copies of your credit reports from the three credit reporting agencies. Review the reports carefully, looking for and repairing errors, and identifying weak areas of your credit that you can address. The better your credit score, the lower the interest rate you will be able to negotiate on your loan.

Step Two: Gather Information

Whether you are applying for a car loan with your bank or at a dealership, it is best to come prepared. Have paystubs handy for proof of income, as well as information about your current income and debt. If you are self-employed, you will most likely need to provide one to two years of tax returns for income verification, so have it easily accessible.

Step Three: Co-Applicants

If your credit rating is poor or your income is not enough, you may want to consider having a co-applicant for your loan. While this is often easy if you are married and want your spouse to be on the title, it can be more difficult for single people. Co-signers take a risk to their own credit, because if you do not pay back the loan, they may be obligated to do so or have their own credit rating damaged.

Step Four: The Application

The loan application will have three basic sections: one section will request your personal information like your name, date of birth, social security number and address. The application may ask how long you have lived in your home or how long you have been with the same employer. These questions are used to assess risk by determining how stable you are. Be sure to complete the application accurately, as most lenders will require verification.

Step Five: The Approval Process

When you apply for a car loan, you often will get almost instantaneous approval or denial of your loan. If you are denied, you have the right to request a copy of the credit report used to make the decision, so you can see if there were any errors that could be corrected. If you are approved, even if the dealership allows you to take the car home, that approval is often contingent on verifications matching what you've put on your loan application.

Be sure you read the loan agreement carefully and understand the obligation you are making. Do not be seduced by lower monthly payments if they come with a higher interest cost over the life of the loan and you can afford to pay it off in less.


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