6 Steps to Take When Getting a Car Loan

You're ready for a new (or new to you) vehicle, so it's time to do some research. Unless you're planning to buy your car with cash, you likely will need a car loan and have a new payment to factor into your budget. You want to take a few steps before you go car shopping that will make the process go smoother and ensure you are getting the very best rate and term for you. Where do you start? We recommend the following:

  1. Check Your Credit Report
    It's essential to know your credit score before applying for a loan. Lenders use your credit score to assess how likely you will be able to repay new debt.

    An estimated 20% of people have incorrect information on their credit report. You have access to one free credit report each year, and through April 2021 can get a free credit report each week. If your score is not where you expect it to be, take a closer look at what's on your report. If something looks fraudulent or incorrect, fix it before applying for a loan. Your free credit report is available at www.annualcreditreport.com.

    The higher your credit score, the better the rates and terms you will receive. If your score is low – and a new car is not an immediate need – take some time to work on improving your credit before applying for loans. It can save you a lot of money over the life of the loan.

  1. Compare Loan Rates
    When looking for the best auto loan rate, options include banks, credit unions, and dealer financing. When you see "as low as" rates, that is the best rate they can offer, typically to top-tier credit scores.

    While getting financing from the dealer may seem like the easiest path, you'll likely end up paying a lot more for the vehicle going that route. If you already have a relationship with a credit union, start there, as they may offer preferred rates to members. Each type of lender weighs details in your credit report differently, potentially giving you various rate and term options to consider.

    If you plan to purchase a vehicle from a private party, be sure your lender will fund this type of loan. Some lenders restrict purchases to dealers or brokers.

  1. Get Pre-Approved
    Getting pre-approved for a car loan gives you the confidence to negotiate your car purchase and helps you get the very best rate. A pre-approval allows you to plan your budget, streamlines the dealership experience, gives you "cash buyer" negotiating power, and provides the flexibility to shop at any dealership you want.

    A pre-approval is for when you're serious about buying. It's a hard credit pull, and pre-approvals are valid for 30 days.

  1. Establish Your Budget
    A standard recommendation is that your car payment should be no more than 10% of your take-home pay. Total car expenses (car payment, gas, insurance, maintenance) should add up to no more than 20%. For example, suppose you take home $4,000 each month. In that case, you want your car payment around $400 and budget an additional $400 for car-related expenses.

    Once you're set with a pre-approval and know your budget, it's time to use an online loan calculator to find the amount you can afford to borrow. Visit https://www.texell.org/calculator/simple-loan, click the box that reads "calculate," and enter your desired monthly payment, estimated interest rate, and term. The result will show you how much you can borrow to stay within your payment.

    Keep in mind that a down payment between 10 and 20% will reduce the amount you need to borrow. How about a trade-in? You can check the NADA website (nada.com) to see what you can expect to receive if you trade in your current vehicle.

  1. Find Your Car
    Now, you're ready to start the search! It's a good idea to set your maximum price below the number you've determined you can afford. This will give you room to negotiate and still remain within your payment amount. It's also good to have that gap to allow for sales tax, registration fee, and documentation fees.

    Think about what kind of car you need. You don't need a new car.  Consider a certified pre-owned vehicle. Pre-owned vehicles cost less and don't depreciate as quickly as a new auto.

    You can also use Texell's Car Buying Service, powered by TrueCar. This allows you to search for vehicles, see what others have paid in the area, and find your car at the lowest price around.

  1. Finalize Your Loan
    If you use your pre-approved offer, follow your lender's instructions to complete the application and finalize funding. Often a dealership will try to beat your pre-approved offer. Be sure to review the dealer's offer carefully, and don't pay for things you don't need. Examples include:
    • Rustproofing
    • Fabric protection
    • Paint protection
    • Etching your VIN on windows to deter thieves
    • Service contract

With any loan you choose to move forward with, review the contract carefully to ensure the rate, loan term, and payment fit your budget. Consider any extras offered on the loan – such as gap insurance – and be aware of all fees associated with the car purchase.

Once your loan is locked in, hit the road knowing you did your research and found the best rate and term. Make your payments on time – this is considered one of the most beneficial factors for a healthy credit report.