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Getting a loan for your next car

Getting a loan for your next car

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You could just stroll into a dealership and let them set you up with your next auto loan, but that is just the easy way, and there is definitely a better way.

Shopping lenders and getting pre-approved for an auto loan first will help you get the best rate available — which may, or may not, be from the dealer, according to

Follow these steps to get a car loan with the best possible rate.

  • Check your credit report

In addition to your income, your credit report will determine how much you qualify to borrow and at what rate.

So whatever you do, don’t apply for an auto loan without checking your credit report. If any information on your report is wrong, such as fraudulent activity, you could be denied or offered only a very high interest rate.

  • Shop for auto loans

Once you understand your credit situation, it is time to check out auto loans and lenders, which can come in the form of:

Large national banks

Local community banks or microfinance banks

Online lenders

Dealership financing, or “captive” lenders

You will want to compare quotes from the first three types of lenders now, even if you plan to take dealership financing eventually. Your own bank may give you a preferred rate for being a customer, so also check with them. You can also compare auto lenders online.

If you want to buy your car from a private party, rather than a dealer or broker, make sure that is allowed by each lender you consider seriously. Some restrict where you can buy your car from.

Here are some important financial terms you might encounter as you shop:

Get lending offers

Once you have narrowed it down to a few lenders, it is time to apply for and compare offers. Getting lenders to compete for your business ensures you are getting the best rate because each one weighs factors in your credit report differently. This means car loan offers can differ wildly.

Some lenders offer pre-qualification, which requires a “soft” credit pull, and others provide pre-approval, requiring a “hard” credit pull, temporarily lowering your credit score. Pre-qualification can help you get a sense of the rate you might get, but pre-approval sets your rate and loan limit and offers more protection at the dealership.

You will need to provide some personal details to lenders for pre-approval. It is important to apply to all pre-approval lenders you are considering.

Keep in mind that pre-approval is not the same as pre-qualification. If you are really ready to buy your car, getting pre-approved for an auto loan offers several advantages. With pre-qualification in particular, keep in mind that your results will only be as accurate as the data you provide. Also, be prepared that your final rate may be higher than the initial offer.

Shopping auto loans: Pre-approval versus pre-qualification

Pre-approval means a lender has reviewed your credit report (not just the score) and other information to determine a loan amount and rate you are likely to receive.

Pre-qualification means you are likely to receive a loan at a given rate (or within a wide range) based on limited personal and financial information. It is not an offer to fund you.

Often has a wide range of interest rates you could qualify for, but doesn’t guarantee any

  • Set your (very responsible) budget

Your pre-approval offers will state the maximum amount you can borrow, but that is not the price of your next car. Set aside about 10 per cent for taxes and fees, and then use an auto loan calculator to work in your down payment, trade-in value and lending terms to see what your monthly payment will be

If that payment is too much for your comfort, remember that the pre-approval offer is just a limit — you can borrow much less if you choose. It is far more important to be able to make your loan payments comfortably — even if the bank says you can afford more.

  • Find your car

Now that you have got financing offers and have figured the maximum cost of your car, it is time for the fun part: picking out your new ride.

To avoid disappointment once you have your heart set on a car, be sure to check the fine print of your loan offers for:

Excluded brands. Some lenders exclude certain car manufacturers from funding.

Dealership requirements. Some lenders require you to shop through a specific network of dealers.

  • Consider the dealer’s offer

With a pre-approved offer in hand, you can see if the dealer can beat that rate.

Once you have taken a test drive and have (hopefully) fallen in love with a car that meets your needs, you may still have a shot at an even better interest rate — from the dealer.

Carmakers set up their own banks exclusively for auto purchases through dealerships, and they offer the lowest interest rates. Once the finance manager finds out you are pre-approved for a set rate, he will likely try to beat that rate to get your business. There is no harm in applying to see how low your interest rate can go.

And if you don’t want to play that game, still be sure to tell the salesperson you are already pre-approved. This is like being a “cash buyer,” so you can haggle on just the price of the car, not the monthly payment

Choose and finalise your loan

If the dealership beats your pre-approved rate (and the other terms are the same), congratulations. You can be rest assured you got a great financing rate. You can take that loan and disregard your other offers. Just be sure to read the contract before signing, to confirm there is nothing sneaky in the contract, like:

Hidden fees. In addition to the cost of the car, you will pay sales tax, a documentation fee and registration costs. Question any additional fees.

A longer loan term. Depending on the APR, adding even 12 months to your loan term can cost hundreds more. Watch out for a better dealership rate at the expense of a longer loan.

Add-ons you did not ask for, like insurance, which you can usually get cheaper elsewhere.

An early payoff penalty. Most auto-lending contracts don’t have this, but it is best to check.

If you do use your pre-approved offer, follow the lender’s instructions to complete your loan application and finalise funding. In some cases a representative from the dealer may contact the lender to initiate funding and in others you follow up with the lender yourself.

  • Make payments

After the transaction is complete, you are ready to drive off into the sunset. Just don’t forget to make payments on your car loan.

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