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How to Secure a Car Loan: A Step-by-Step Guide

Purchasing a car is one of the most significant financial decisions you’ll make. Understanding the car loan process can help you secure the best deal. While dealerships can arrange financing, you might get a better interest rate by applying on your own and getting preapproved. Here are six steps to help you get a car loan.

1. Determine Your Budget

According to Experian’s Q3 2023 State of the Automotive Finance Market report, nearly 80% of new car buyers and 38% of used car buyers finance their purchase. The average monthly payment is $726 for new cars and $533 for used cars. Assess your budget to determine how much you can afford for a monthly payment and other ownership costs, including:

• Insurance premiums
• Fuel or electricity
• Maintenance
• Repairs

Consider other monthly debt obligations, such as credit cards, student loans, and a mortgage. Auto lenders typically prefer a debt-to-income ratio below 50%, but the lower, the better.

2. Check Your Credit Score

Your credit score is crucial for determining your eligibility and loan terms. You can check your FICO® Score for free with Experian. Here are the FICO® Score ranges:

• Exceptional: 800 to 850
• Very good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579

Note that the credit score you see may differ from the one the lender uses. Many auto lenders use the FICO Auto Score, which ranges from 250 to 900. However, your base FICO® Score can still help gauge your creditworthiness.

3. Compare Auto Loans

After assessing your credit health, compare auto loan offers from various lenders. Many lenders offer prequalification tools that don’t impact your credit score. Consider interest rates, repayment terms, prepayment penalties, and other terms. Options include:

• Banks: Check if you qualify for a relationship discount.
• Credit unions: Often offer lower interest rates but require membership.
• Online lenders: Allow prequalification and may offer competitive rates.

If you apply to multiple lenders, do so within a short period to minimize the impact on your credit score.

4. Get Preapproved for a Car Loan

Preapproval involves completing a preliminary application with a lender who reviews your credit and financial information. They will inform you of the loan amount and interest rate they can offer. Preapproval usually involves a hard inquiry, which can impact your credit. However, it provides a more accurate interest rate based on complete information. You may need to provide:

• Full name
• Social Security number
• Date of birth
• Address
• Contact information
• Vehicle make and model
• Desired loan amount

Preapproval doesn’t obligate you or the lender to enter into a loan agreement.

5. Visit One or More Dealerships

Research dealers in your area to compare sales prices. This information can help you negotiate the price and get the best deal. With preapproval, you can minimize financing discussions, often the most time-consuming part of the process.

6. Finalize the Loan

After agreeing with the dealer, contact your lender to finalize the loan terms. You may need to provide additional documentation, such as:

• Proof of income
• Proof of residence
• Proof of insurance
• The vehicle purchase agreement

If approved, you’ll receive a loan agreement detailing the terms and conditions. Review it carefully, then sign to complete the process. Note your first payment due date and set up automatic payments.

Frequently Asked Questions

Can I Use a Car Loan to Buy a Car From a Private Seller?

Yes, many lenders allow you to use a car loan to purchase from a private seller.

Where Is the Best Place to Get a Car Loan?

The best place depends on your financial situation. Compare offers from banks, credit unions, and online lenders to find the best terms.

How to Get a Car Loan With Bad Credit?

Some lenders specialize in working with bad-credit borrowers. Improving your credit score before applying can help you secure better terms.

Make an Informed Decision

A car loan can help you purchase a vehicle while building your credit. Take your time to shop around for the best loan deal and understand all terms before signing. If your credit needs work and your vehicle situation isn’t urgent, review your credit score and report for free and make improvements based on your findings.

Once you know your credit standing and what you need to do to improve it, you’ll be better informed about your options and next steps.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. We’re here to help you with all your financing needs!

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