Prepare to Apply
Traditional and non-traditional lenders have similar criteria when looking into an applicant’s profile.
Therefore, it is a good idea to know exactly where you are standing before shopping around for loans.
First and foremost, be sure to know exactly how much money you can afford to use monthly toward a car loan.
There are several websites dedicated to loans where you can run calculations on estimated interest rates and monthly payments. This exercise can help you figure out the amount that you could eventually ask for.
However, do not forget that once you own the car, other “additional costs” will mount up to your regular monthly costs such as paperwork for the vehicle, gas, insurance, services, etc.
Secondly, all lenders will have a look at your credit history and score; it’s a good idea to be aware of your rating and credit status.
If you are a credit cardholder, have a mobile phone contract, or applied to other loans before, then it will all be considered as part of your credit history.
Last but not least, proof of income is fundamental. Either if you are self-employed or employed full or part-time, lenders will require that you demonstrate how much you earn.
Figuring out how much money you are prepared to put towards a loan, how your credit status is, and what proof of income you can present, is an excellent prep to get you started.
Bank Loans vs. Dealer Finance vs. Peer-to-peer Lending: What Suits You Best?
Bank loans can be either secured or unsecured. Secured loans require an asset, typically the car you will be buying, as collateral in case you fail to pay the monthly installments. This means you could potentially lose the vehicle.
Unsecured loans require no collateral, but since the lender is then taking a more significant risk, the interest rates can be higher.
Another thing to keep in mind when considering bank loans is fixed vs. variable interest rates.
Fixed rates translate into an exact amount to be paid monthly throughout the life of the loan, yet; extra fees might apply in case you wish to refinance or pay the loan off early.
The option of variable rates considers a fluctuation on the interest charged throughout the loan’s lifespan, however, refinancing or paying off the loan sooner is not subject to penalty fees.
Flexibility with this type of loan lies in the concept of withdrawing a lump sum amount to shop for used or new cars with either private individuals or car dealers, as you find suitable.
Car dealerships generally offer to organize the finance for you according to your credit status, income, and residency.
Sometimes these deals include incentives like interest-free deals for the first few months. Arranging this type of loan is reasonably quick.
On a side note, car dealer loans may require an initial down payment or a large payment at the end of the loan term, also known as a balloon payment.
If you have savings to use as a deposit and would rather buy a new car than a used one, this might be the right choice for you!
Peer-to-Peer Lending: P2P
Another viable option is peer-to-peer lending. Using an online platform, P2P enables you to seek a loan from a private lender.
The application process and selection criteria are unique to each platform, and different restrictions may apply. For example, some platforms require a minimum annual income or credit score.
Given that P2P platforms operate like marketplaces, it is complex to compare like-for-like charges.
However, an advantage of this type of loan is that loan terms can be shorter with similar or lower rates than the more traditional lenders.
What You Are Looking for and How to Get It
Your aim should be to qualify for an affordable loan that enables you to meet the monthly payments while keeping the interest rates as low as possible.
You do not want to overstretch your finances.
Options to Get Ahead of the Game
Get a Co-applicant or Co-signer
If creditworthy, a joint application will increase the probabilities of approval and likely, at a lower interest rate.
A co-applicant shares rights to the car as much as the responsibility for its payment. A co-signer works as a guarantor but has no rights to the vehicle, yet their credit score might drop if you default.
Use a Down Payment
Show them the money. If you have a limited credit history, this is an excellent way to show discipline and make the lender more comfortable with lending you money.
The higher the deposit, the lower the lender will perceive the risk.
Choose a Car According to Your Budget
There’s a variety of reliable and appealing models out there, used or new.
Use auto finance calculators to make a budget and choose wisely before getting into financial commitments you might regret later on.
Work on Your Credit Rating
The Consumer Financial Protection Bureau offers different recommendations to upgrade your credit ratings, such as using store cards or secured credit cards. Improving your score before applying for a loan is a smart move.
When looking for car loans, there’s plenty of options out there.
The trick is knowing what you need, what you can offer, and planning your credit application accordingly.
If you do your homework right, you will surely find a suitable option to match your borrower profile.