How To Get a Car Loan 2024
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Based on data from J.D. Power, the average expenditure for a new car in January 2023 stood at $46,437, marking a 4.2% surge from January 2022. Given the escalating prices of automobiles and the prevalence of relatively low interest rates offered by many auto loan providers, it's understandable why consumers opt for financing their vehicle purchases.
For those currently in the market for a car loan, the options are abundant. Banks, credit unions, online lenders, and car dealerships are all potential sources of financing. However, the challenge lies in streamlining these options to identify the auto loan that aligns best with your requirements. Here's a guide to get started:
Assess Your Credit Score
Prior to embarking on the comparison of auto loans, conducting a review of your credit reports and scores can be advantageous. Understanding your credit standing aids in establishing realistic expectations while seeking a loan. A favorable credit profile, devoid of derogatory marks, often translates to eligibility for lower interest rates. Lower rates, in turn, equate to reduced expenditure (potentially saving thousands of dollars) over the duration of your car loan.
You have the option to access your credit reports from Equifax, Experian, and TransUnion at no cost through AnnualCreditReport.com. However, it's important to note that your credit scores are not included in these reports.
If you wish to check your credit scores, you can utilize complimentary services such as Credit Karma or Credit Sesame. Additionally, some credit card issuers, such as Chase, Discover, and Capital One, offer free access to your credit scores. Alternatively, there are various paid services available for this purpose.
Capital One has revealed its intention to purchase Discover Financial Services, which is a significant development.
Capital One declared on February 19, 2024, its plan to acquire Discover Financial in a $35.3 billion all-stock transaction. The approval of the deal by regulators remains uncertain. If approved, the deal is anticipated to conclude by early 2025. The ramifications of this acquisition on credit card users, borrowers, bank account holders, and other stakeholders are yet to be determined. We are closely observing the situation and will provide updates to this article as necessary.
TIP : Your credit reports and scores play a vital role in managing your finances effectively. Explore our recommendations for top credit monitoring services to gain comprehensive insights into your credit profile, empowering you to make well-informed decisions.
Establish Your Financial Plan
Once you've assessed your credit score, it's essential to evaluate your financial situation. This step will enable you to determine a suitable monthly payment that aligns with your budgetary constraints. Alongside the monthly payments throughout the loan period, consider the following expenses:
1. Initial Down Payment: Many car purchases necessitate an upfront down payment. Incorporate this into your overall initial expenses.
2. Insurance: Car insurance is obligatory in nearly all U.S. states, with varying coverage requirements. New Hampshire is an exception, where it's possible to forgo insurance if adequate financial reserves are proven. Factor in the monthly Prémíùm costs as you budget for your new vehicle, acknowledging that these expenses may fluctuate based on the type of vehicle you select. Refer to our recommendations for the best car insurance to streamline your decision-making process.
3. Maintenance: Maintenance expenses are a significant factor to contemplate. While purchasing a new car may postpone substantial repair costs for a period, routine maintenance tasks such as oil changes remain necessary. If considering a used vehicle, investing time in researching models known for requiring minimal maintenance can be beneficial.
4. Fuel: Additionally, budget for fuel expenses, which will vary depending on driving frequency, vehicle type, and gas prices. Analyze your current gas expenditures as a reference point for formulating your new car budget.
TIP : For assistance in budgeting, contemplate utilizing an auto loan calculator. This tool can assist in approximating monthly car payments and evaluating how factors such as your down payment and interest rates might influence overall expenses.
Obtain Pre-Approval for Various Car Loans
Once you've determined your comfortable budget for a new or used car, it's advisable to explore loan options from different lenders. This comparison process allows you to gain insights into the available rates and terms, enabling you to secure the most suitable loan for your circumstances.
Seek pre-approval for auto loans from multiple credit unions and banks to assess loan amounts, interest rates, and terms. Typically, pre-approvals do not impact your credit score (ensure to review the lender's disclosures thoroughly), although in some instances, you may be required to complete a full application to view potential loan details.
While submitting a full loan application may result in a hard credit inquiry and a minor dip in your credit score, credit scoring agencies like FICO recognize rate shopping for car loans as a standard practice. Consequently, multiple hard inquiries and loan applications made within a specified timeframe (usually 14 days, sometimes up to 45 days) are typically counted as a single inquiry for credit-scoring purposes.
Acquiring pre-approvals not only facilitates loan comparisons but also provides leverage when negotiating with dealerships, as discussed further below.
The Best Auto Loan Rates
| Lender | APR* | Loan Amounts | Loan Terms |
|---|---|---|---|
| AUTOPAY | As low as 2.99% | $2,500–$100,000 | 2–8 years |
| Consumers Credit Union | 5.54%–9.04% | $500–$350,000 | 1–7 years |
| LendingTree | As low as 2.24% | $5,000–$150,000 | 1–8 years |
| LendingClub | 3.99%–24.99% | $5,000–$55,000 | 24–84 months |
| PenFed Credit Union | 5.19%–17.99% | $500–$150,000 | 3–7 years |
| Carvana | Not Disclosed | Not Disclosed | Not Disclosed |
| OpenRoad Lending | 1.99%–24.99% | $7,500–$100,000 | 2–6 years |
APRs are accurate as of publication.
TIP: Learn more about our top picks here: The Best Auto Loan Rates.
Select a Vehicle Within Your Budgeted Loan Amount
Prior to visiting a dealership, it's essential to have a specific vehicle make and model in mind to ensure it aligns with your financial constraints. Car comparison platforms such as Kelley Blue Book and Edmunds provide valuable information on car pricing, along with potential trade-in valuations for your current vehicle.
TIP : Conducting thorough research in advance will assist you in streamlining your choices and making a well-informed purchasing decision. Furthermore, it will enable you to ascertain whether the dealership's car prices are in line with prevailing market values.
Compare Pre-Approval Offers with Dealer Loan Options
Auto loans facilitated by car dealerships may often entail higher interest rates compared to direct loans obtained from credit unions and banks, serving as a means for the dealer to enhance their profit margins. Conversely, in certain instances, dealerships might negotiate more favorable rates with their affiliates than what you could secure independently. With a pre-approval in hand, you might be in a position to negotiate a lower rate with the dealer yourself or sidestep potential upsells, as you'll have a predetermined budget.
Bring copies of any pre-approval offers you've received to the dealership. When presented with financing options from the dealer, compare the loan amounts, annual percentage rates (APRs), and terms with those obtained from other lenders. Don't hesitate to request the dealer to offer a rate better than your most advantageous pre-approved rate.
Before finalizing any auto loan agreement, carefully scrutinize the contract. Look out for factors such as hidden fees, additional vehicle features, penalties for early repayment, and extended loan terms that could inflate the overall borrowing costs.
Managing Your Payments
Upon approval for an auto loan, setting up automatic monthly payments can streamline the repayment process. Many lenders offer online platforms where you can enroll in autopay or schedule payments directly from your bank account. Some lenders, such as Chase, even provide mobile apps for added convenience.
Falling behind on car loan payments may result in late fees, depending on the lender's policy. Moreover, missed payments, especially multiple occurrences, can significantly impact your credit score as auto loan payment information is reported to credit bureaus. Continued delinquency may even lead to defaulting on the loan, prompting the lender to repossess your vehicle for private sale or auction.
Understanding Credit Score Requirements for Car Loans
Various lenders impose distinct minimum credit score criteria for loan applicants. While some demand good credit for loan approval, others extend financing options to individuals with poor credit. Generally, borrowers with good or excellent credit scores secure lower interest rates on auto loans. Start your search by exploring the best car loans tailored for all credit levels.
Determining Income Requirements for Car Loans
Income prerequisites for car loans vary among lenders. Most lenders assess your debt-to-income (DTI) ratio—a comparison of your monthly debt obligations to your total monthly income—before approving a loan. Certain lenders may mandate a DTI ratio below specific thresholds, like 36% or 43%, although criteria may vary.
Addressing Payment Difficulties
If you encounter difficulties meeting your car payment obligations, promptly contact your lender. They may offer options such as revising your payment plan, temporary payment suspension, or negotiating a lower interest rate to ease your financial strain. Alternatively, refinancing your vehicle to extend the repayment term and reduce monthly payments might be feasible.
Exploring Early Loan Repayment
While paying off your car loan ahead of schedule is feasible, be cautious of potential prepayment penalties. Some lenders impose fees for early repayment, necessitating a thorough review of your loan agreement or direct communication with your lender beforehand. This ensures you can settle your loan early without incurring additional charges.
