Auto Loans Information & Guide

If you're in the market for a new car there has really never been a better time to buy. Dealers are offering great financing rates and incentives to help attract new buyers. Getting an auto loan is a great way to help finance your new wheels, but getting an auto loan can be tricky. Hopefully we can help to demystify the process a little bit and give you some solid advice to follow before you pay way too much for your new vehicle.

Auto Loan Interest Rates

Before you apply for an auto loan it's important to understand how the interest rate will affect your monthly payments and the amount of money you will pay over the life of the loan. Getting the best possible interest rate can save you thousands of dollars on your auto loan and is mainly impacted by the current marketplace and your own personal financial situation. Here are a few factors to consider when choosing an auto loan.

The Lender - Unless you're able to pay cash upfront for a new car you're going to need to borrow some money. Banks, credit unions and even in-house financing may be viable options for you, although each has their own set of pros and cons.
The Car - Will you be buying a brand new car? An off-lease special? Or a rust bucket from the last century? New auto loans will typically provide the lowest rates.
Loan-term - How long do you plan to take to pay off your new auto loan? A loan setup for 2-3 years will typically have a much lower interest rate than a 5 year loan.
Your Credit - Of course, like any other credit your own personal credit history will play a large part in what kind of rate you will get on your auto loan. People with a poor credit history are seen as more of a risk and are in turn charged more in interest to help cover that risk.

In general, a credit union will provide you with a better rate than a bank will, assuming you can get approved. Sometimes your best bet is to go with automaker financing. They typically provide 0% financing during promotional periods, even on 5 year loans. Dealerships also have other incentives for auto loans that they can pass on to the buyer.

Auto Loan Approval

You will be required to provide some documentation when applying for an auto loan. Bringing this documentation with you when you apply will save you a lot of time. All lenders require different levels of documentation so it may be helpful to phone ahead to figure out exactly what will be required. Here are a few common things they ask for during the auto loan approval process:

Proof of Income - This will usually be copies of your pay stubs from the previous month. If you receive hand written pay stubs you may be required to bring cancelled checks from your employer. If you're self employed you may be required to bring your tax return statements from the previous two years to prove your income.
Credit History - Most lenders want to know what you've been up to financially to determine how much of a risk it will be to borrow you money. You may be required to provide mortgage or lose agreements, statements from your credit cards and possibly even some recent bank statements.
Proof of Residence - Typically your mortgage statement will be enough to prove where you live. Utility bills sent to your home address might also be acceptable.
Vehicle Info - Some lenders will require you to bring the dealer sheet outlining the vehicle information, including the VIN, year, make and model. If you're buying a used car they may also require information regarding the mileage.
Insurance - You will probably need to prove that your new car is being insured as well. No one wants to lend money to someone who could potentially lose all of their collateral in a car accident with no insurance.

Applying for an Auto Loan

The most important thing to do before applying for an auto loan is to shop around. There are literally thousands of different companies you may be able to get an auto loan from. Every company is different and will give you a different interest rate based on their specific factors. You may look like a huge risk to one lender while you may look great to another. It all really depends on what kind of criteria each company is looking for.

Once you've determined where you'd like to try to get a loan from all that's left to do is apply. Unfortunately, every time you apply for new credit you will bump your credit score down a few points based on the inquiry to your credit history. After a few inquiries, your score may take such a beating that no one will accept you for a new loan. If you are denied a few times you may want to consider waiting a few months or even a year or two before applying again so that your credit score can return to normal.

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