A step-by-step guide to getting a car loan
Applying for a car loan can sometimes be more overwhelming than buying the car itself, with all the research and paperwork involved.
But getting a car loan can be much easier these days and can be done relatively quickly online. And by following the right steps, you might even have the upper hand when negotiating a car purchase.
To help you buy your dream ride, RateCity has put together a step-by-step guide to applying for a car loan.
Step 1: Check your credit score
Checking your credit score is possibly one of the most overlooked steps in getting any kind of personal financing. It’s a number that most people don’t think too much about, despite it being unique to you. However, your credit rating is one of the main factors that determines your chances of being approved as well as your interest rate. The higher your credit score, the more likely you may be approved for a car loan and the lower your interest rate may be in some cases.
Step 2: Do your research
One of the best ways to prepare yourself for a loan application is to do sufficient research. Use online tools and calculators to help you work out the numbers conveniently. Some of the things you might want to look into are:
- The price range for your next car.
- How much you might be able to borrow, based on your financial standing.
- How much your potential car repayments could be.
- The term you want to repay your car loan over.
- Any other potential upfront or ongoing costs (e.g. insurance and maintenance) you may face.
Step 3: Compare car loans
As part of your research before making a loan application, take the time to compare car loans on the market to find one that’s right for you. It’s a good idea to do this before you even start looking at cars. Here are some features of a car loan you should be weighing up:
- Interest rate – both the advertised rate and comparison rate.
- Fees – such as application fee, monthly fees, early exit fees etc.
- Features – including the ability to make extra repayments and pay off the loan early.
- Loan term – usually between one to seven years.
- Loan type – secured or unsecured.
- Lender type – you could consider going to a bank, non-bank lender, peer-to-peer lender, car manufacturer or dealership.
Step 4: Apply for pre-approval
While pre-approval is an optional step in the car loan application process, it may be helpful for some people. Pre-approval is when a lender agrees to lend you a certain amount of money before you purchase a car, while still allowing you or the lender to back out if either one of you changes their mind. The lender still needs to assess your financial situation before giving the initial green light, so it’s a good indication of whether you’d be approved, though it’s in no way a guarantee.
Pre-approval gives buyers a clear idea of how much you can really afford. Armed with this knowledge, you can head to a car dealership or approach private sellers with better confidence that you won’t be over stretching your budget.
Step 5: Secure full loan approval
After gaining pre-approval and making your mind up on the car you want, you’re ready to apply for the real deal. You should make sure the vehicle you’ve chosen is qualified for the car loan you’re applying for. Things to take note of are the vehicle’s age, mileage and model.
The specific documentation required and application process may vary from lender to lender, but you can expect to be asked for:
- Personal information and identification – drivers’ license and/or passport.
- Proof of income – recent payslips, tax returns, and as bank statements that show income and expenses.
- Proof of assets and liabilities – credit card statements and details of any other loans you have, including mortgages or personal loans.
- Information about the car you’re buying – vehicle details, contract of sale, car registration and proof of insurance.
How long it takes for a decision to be made will depend on the lender and whether it’s a straightforward application. Sometimes, the lender may need more information from you, which may drag out the waiting time.
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Previously a financial writer for RateCity, Alison Cheung specialised in housing and real estate. Since 2015, she has written about commercial and residential property for Domain Group and NewsCorp in print and online, and has been published in both Domain and RealEstate.com.au. Alison is passionate about property investment and innovations in the real estate industry, and firmly believes in the most basic yet vital financial advice ever given: saving for a rainy day.