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How to Qualify For Traditional Car Financing

Find Out What It Takes to Get a Car Loan From a Bank or Credit Union

Buying a new-to-you vehicle is exciting, but having to figure out your best car finance option can take the shine off the experience. If you're unsure about how to get approved for a car loan, you're not alone.

Let's break down the world of standard auto loans and give you the tools to approach lenders confidently. If you aren’t confident you’ll qualify for a traditional loan, check the end of this guide for alternative financing options.

The Basics Of Auto Loans

Before we get into the approval process, let's cover the fundamentals. An auto loan is an agreement between you and a lender. They provide money for your car purchase, and you pay it back over time, usually with interest. Standard loans typically come from banks or credit unions, rather than dealership options like an in-house financing car lot.

Used Car

These are the key parts of a traditional car loan.

  1. Borrowed Amount: How much you're asking for to buy the car. The borrowed amount is the cost of the used car, minus your down payment.
  2. Interest Rate: The cost of borrowing, shown as a yearly percentage.
  3. Payback Time: How long you have to repay the loan. Payback time, or “term” is usually listed as a number of months, such as 24 months for a two-year loan.
  4. Monthly Payments: What you pay each month, including the borrowed amount and interest.

What Lenders Look at When You Apply For Used Car Financing

Knowing what lenders check in your application can help you present yourself as a good borrower who they can trust to repay the loan.

Your Financial Reputation: Credit Score and History

Your credit score is a quick way for lenders to gauge how reliable you are with money. This three-digit number can greatly affect your loan terms. It is determined by a variety of factors and calculated by credit bureaus, such as Experian, TransUnion, and Equifax.

  • Top-notch credit (800+): Best chance for excellent car finance rates.
  • Strong credit (740-799): Likely to get good terms.
  • OK credit (670-739): Might qualify, but rates may not be as good.
  • Not-so-great credit (580-669): Odds of approval are lower. Expect higher interest rates if approved.
  • Poor credit (below 580): Getting a traditional loan will be difficult.

To raise your credit score:

  • Pay your bills on time, especially your credit card bills, loans, or other personal lines of credit.
  • Keep credit card balances low.
  • Don't apply for new credit before seeking a car loan.

Money Matters: Income and Job Stability

Lenders want to know you have steady money coming in to pay back the loan. They usually check:

  • How long you've been at your job (2+ years in the same role is good)
  • If you make enough to cover loan payments and other expenses

Money Health Check: Debt-to-Income Ratio (DTI)

Your DTI shows how much of your income is tied up in repaying debts. Lenders use this to see if you can handle more debt.

How to figure out your DTI:

  1. Add up all your monthly debt payments.
  2. Divide by your monthly pre-tax income.
  3. Turn it into a percentage.

Try to keep your DTI at 40% or lower to improve your chances of getting approved.

Showing You're Serious: Down Payment

A big down payment can really help your car loan application. It means you need to borrow less and shows you're good with money.

Getting Ready to Apply For Car Financing

Now that you know what lenders look for, here's how to make your application stronger.

1. Look Over Your Credit Report

Before you apply for a car loan:

  • Get your free credit report and check your score.
  • Check for mistakes and fix any you find.
  • Find ways you can improve your credit, like paying down your credit card balances or making consistent, on-time payments.

2. Save Up for a Down Payment

Start putting money aside for a down payment as soon as you can. This not only helps you get approved, but you can get better car finance rates, too.

3. Get Your Papers Together

To make applying easier, have these ready:

  • Proof of how much you make (pay stubs, tax returns).
  • Proof of where you live (bills, lease agreement).
  • ID (such as a driver’s license).

4. Know the Current Loan Rates

Knowing about car finance rates helps when you're talking to lenders. Do some research to see what rates are common right now. Because rates are set by the government, they can change every day. Be prepared to apply when the rate is right for you.

5. Think About Getting Pre-Approved

Many lenders offer pre-approval for car loans. This:

  • Tells you how much you can spend.
  • Helps you negotiate at the dealership.
  • Often doesn't hurt your credit score like a hard inquiry can.

Other Options if You Can't Get a Standard Loan

If you're having trouble getting approved for a standard car loan, don't worry. You have other choices:

  1. In-house financing car lots: Some car lots, also called buy here pay here dealerships, offer their own loans, even to those with lower credit scores.
  2. Secured loans: Using something you own as backup can help you get approved.
  3. Getting a co-signer: Having someone with good credit sign with you can help you get better terms.
  4. Work on improving and try again: Sometimes, it's best to spend some time making your finances look better before you apply again.

Wrapping Up: Getting Approved for a Car Loan

Getting a traditional car loan might seem hard, but with the right knowledge and preparation, you can do it. The key is to show you're responsible with money by having good credit, steady income, and a solid down payment ready.

If you’re unable to qualify for used car financing from a bank or credit union, don’t worry. There are alternatives out there that can get you behind the wheel of a reliable car even if you don’t have perfect credit.