New vehicles can bring new credit responsibilities. Financial blogger Ash Cash shares tips on what you'll need to consider when planning ahead for a new car loan.
Buying a car is often the first big purchase many people make. If — like many Americans — you can't pay cash for such a purchase, you may be planning to get a car loan and are wondering about the basic qualifications. To make your new car a reality, you'll need to have the following in hand in order to qualify for the loan:
- Proof of Identity and Residence
This may not be necessary if you are applying for a loan at a bank or credit union with which you already have a relationship. However, if you're working with the lender for the first time, you'll need to provide proof of your identity and residence. For obvious reasons, lending institutions want to make sure that you are who you say you are. They also need to know where they can find you if you stop making payments. Each lending institution has its own criteria as to what it will accept as identification and proof of address, but for the most part, a state- or government-issued photo ID and a utility bill should be adequate.
- Proof of Income
Having a steady income is something most lending institutions look for when trying to qualify you for a car loan. Before they extend a loan to you, lenders want assurances that you can afford to pay back what you borrow. Your pay stubs or bank statements are usually enough proof, but each lending institution maintains its own criteria regarding acceptable documentation.
- A Good Credit Score
Having a good credit score is important to qualifying for a good car loan. A "good" credit score is relative and really depends on the scoring system the lending institution uses. Each scoring system uses a different scale, but as a general rule, if you have a good credit score from one of the three major credit reporting agencies, chances are your scores from other institutions will fall within a comparable range. Lenders may choose to approve you for a car loan even if you have a less-than-ideal credit score, but may charge you a higher interest rate or require a cosigner with strong, established credit. Some lenders specialize in working with people who have bad credit scores, but loans from them may cost you thousands of dollars in interest, so it behooves you to check your credit scores and do what you can to strengthen your credit prior to applying for a loan.
- A Down Payment
Having a down payment will help you qualify for a loan and may help you obtain a lower interest rate. Lenders tend to look favorably upon borrowers prepared to make a down payment because it makes default on the loan less likely. Many car dealerships promote "no down payment" offers, but don't be fooled. Not making a down payment will inflate your monthly payments, making it more challenging to afford each month and causing you to pay more for your car over the life of the loan.
Qualifying for a car loan can be easy if you're proactive before visiting the dealership. One of the best ways to prepare for your dealership visit is to become familiar with your credit and boost your credit confidence, as well as understand the role credit scores play in your loan approval process.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Experian.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer, or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.