How to apply for car loan, Earlier, buying a car was a milestone in one’s life as one had to part with a huge amount of money, but now one can simply take a car loan.
Banks offer car loans with easy equated monthly installments, which make it easier to afford a car without disturbing one’s budget. Buying a car consists of two major activities: (1) finding the car, and (2) taking out a loan to pay for it.
Almost all banks and lenders these days allow you to apply online and make a paperless application.
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Although different banks offer different procedures for getting car loans, the basic procedure is the same. The first step of getting a car loan is finalizing the brand and model of the car that you want to purchase. Next, you need to check your eligibility for the loan. You can do so by visiting the website of the bank and checking if you meet the eligibility criteria.
The next big step is to figure out your loan amount. It will depend on how much you can pay now, for long do you want the loan to go on, and the interest rate. You can use the EMI calculators available on banks’ websites to decide on your loan amount and tenure.
Once you’ve decided on the car model, the bank as well as the loan amount and tenure, you can begin the application process. You can either visit a branch or apply online by visiting the bank’s page. You will need to submit income proof, age proof, identity proof, and address proof. Some banks take seconds to approve your loan. Once approved, funds are transferred instantly to your account. You can then pay for your car.
To get a car loan with the best interest rate, it’s essential to follow certain steps and they are.
Check your credit report
Your credit score and your income will determine how much you qualify to borrow — and at what interest rate.
Don’t apply for an auto loan without checking your credit report first. If there are any errors or incorrect information on your report, such as fraudulent activity, you could be turned down for a loan or offered only a very high-interest rate.
Apply for car loans from multiple lenders
Once you’ve checked your credit, it’s time to look at auto loans and lenders, which can be categorized as:
Large national banks, such as Bank of America or Capital One.
Local community banks or credit unions.
Online lenders that only provide auto loans.
Dealership financing, or through automakers’ “captive” lenders.
You’ll want to compare quotes from the first three types of lenders first, even if you plan to take dealership financing eventually. Your bank or credit union may give you a preferred rate, especially if you agree to automatic loan payments from a checking account there.
Get preapproved for a car loan
Once you’ve narrowed your search to a few lenders, it’s time to request interest rate quotes and compare offers. Getting lenders to compete for your business helps you get the best rate. Also, because lenders weigh factors in your credit report differently, car loan interest rate offers can differ widely.
When applying to lenders, you can be pre-qualified or preapproved for a loan. If you’re ready to buy your car, getting preapproved for an auto loan offers several advantages, such as giving you more negotiating power at the dealership and protecting you from marked-up rates.
Use your loan offer to set your budget
Your preapproval offers will state the maximum amount you can borrow, but that’s not the price of the car you can buy. You should allow an additional 10% to cover taxes and fees. Use an auto loan calculator to design your loan. Put in your down payment, the trade-in value of your current vehicle (if any), and lending terms to find the right monthly payment that fits in your budget.
If that payment is too much for your comfort, remember that the preapproval offer is just a limit — you can borrow much less if you choose. It’s 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’ve got financing offers and know the maximum car price you can finance, it’s time for the fun part: picking out your new ride.
Review the dealer’s loan offer
Once you’ve taken a test drive and have found 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 banks exclusively for auto purchases through dealerships, and they sometimes offer below-market interest rates. Once the finance manager finds out you’re preapproved for a set rate, he’ll likely try to beat that rate to get your business. There’s 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’re already preapproved. Tell the salesperson you are a “cash buyer,” so you can haggle on just the price of the car, not the monthly payment.
Choose and finalize your loan
If the dealership beats your preapproved rate (and the other terms are the same), congratulations — you can 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’s 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 didn’t ask for, like gap insurance, which you can usually get cheaper elsewhere.
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An early payoff penalty. Most auto lending contracts don’t have this, but it’s best to check.
If you do use your preapproved offer, follow the lender’s instructions to complete your loan application and finalize funding. In some cases, a dealership representative will contact the lender to initiate funding, and in others, you follow up with the lender yourself.
Make payments on time
After your auto loan is locked in, you’re ready to drive off into the sunset. But don’t forget one more step — making on-time car loan payments. Your lender will most likely provide online access to your loan information, where you can set up automatic payments. Taking time to do this helps you build a history of on-time loan payments, an important contributor to your credit score, and the ability to get a loan with better rates in the future.
How Car Loan works
Consider this scenario: You want to purchase a four-wheeler and have your heart set on a car. But you don’t have enough funds to buy the car. In such a case a bank or a lender will pay the car dealer in full or part on your behalf. Now you have to pay the bank or lender over some time, plus the interest charged by the bank or lender for the advance.
What you pay to the bank is an installment every month. This installment is inclusive of the amount payable, the interest charged as well as the processing fee. This monthly installment is called an Equated Monthly Installment. The EMI for your loan is dependent on the tenure of your loan. The longer the tenure, the lower is the EMI, and the shorter the tenure, the higher is the EMI.
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if you are planning to purchase a brand new car from a showroom, you are eligible for a New Car Loan from a bank or lender. If you are eyeing a brand new car but do not have sufficient funds in your pocket to make the purchase, banks or lenders will come to your rescue. Car loans work as a cycle for banks and lenders. They use the payment made by loanees to further lend them future loanees.
Apart from a rate of interest and a processing fee, banks and lenders may also apply a premium to the rate at which you are borrowing. The details will be available with the banks and make sure to ask about all the fees and premiums on the loan.
Car Loan application process
The Car Loan application process is very simple. Once you have decided on the model and make of the car that you want to purchase, you can compare the different car loans available at different banks or lenders. You can check your eligibility with each of the banks. Choose the right car loan with a bank of your choice. Make sure you are eligible for the loan before applying so that your application is not rejected.
To apply for a car loan, you can either visit a branch of your bank/lender or log on to the website of the bank. The online application process is faster, paperless, and hassle-free. To apply for the loan you need to submit the following documents: income proof in the form of salary slips for the last three months of bank statement for three months or income tax returns filed for the past three years. You have to submit identity proof, age proof, and address proof.
Once you submit copies of these documents, your application process is complete. It is now up to the bank/lender to approve or reject the application.
Car Loan Approval Process
In the new age of the Internet, car loan applications are processed instantly. If you apply for a car loan online or offline and submit all the required documents, it is not the bank’s call to start the process.
The bank will verify the documents at its end and check the applicant’s credit score. The bank will also check if the applicant is eligible for the loan. This process takes a few seconds. If the applicant is found to be eligible, the bank approves the loan instantly. Most banks approve loans instantly these days. Just make sure you are eligible for the loan before applying.
Once the loan is approved, the funds are directly transferred to the applicant’s account within seconds. You can purchase the car as soon as funds are credited to your account.
Get Your Credit in Check
The moment you decide a loan is in your future, check your credit. Your credit score, also known as a FICO score (Fair Isaac Corp. for the organization that founded the system) predicts your likelihood to repay a loan. Scores range from 300 to 850, with the average American having a score of 675. A top-tier score (or prime) is 700 to 850, near-prime is 620 to 700 and subprime is less than 620 [source: Buss].
How do you know where you fit? Check out your credit report from the three main credit bureaus — Equifax, Experian, and Trans Union. Thanks to the Fair and Accurate Credit Transaction Act, you can obtain a free report annually from each of the bureaus.
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What should you consider when choosing auto lenders?
Auto lenders may have different criteria for loan approval, and the terms you receive can vary from one lender to another. Some lenders may require a down payment, and some may offer longer or shorter loan terms than others.
Shopping for the best loan terms can lead to significant savings, even if there’s only a difference of 1 or 2 percentage points in the interest rate. For example, on a $20,000 loan paid off over five years, the difference between a loan with a 4% and 6% annual percentage rate, or APR, could end up being around $1,100.
When choosing a lender, find out what types of loans they offer and if they have any special requirements. Some lenders may only finance new and used car purchases, while others may offer a range of loans, including for a refinance or lease buyout. And some lenders only work with dealers that are affiliated with auto manufacturers, while others work with independent dealers and will finance purchases from private parties.