So you’ve decided to purchase a car. Like most people, you probably didn’t pay cash for it or trade in your current vehicle. Instead, the car was purchased via an auto loan. After all, practically anyone can get approved for an auto loan these days with such reasonable interest rates and low requirements. However, just because almost anyone can get an auto loan does not mean that everyone should. Before applying, there are seven things you should have in place to make sure your application is successful.
1. A Favorable Credit Report
Your credit report is an important factor in your ability to get approved for a loan. You may be wondering what you can do if you have bad credit. Well, no matter what your circumstances are, the best thing you can do is check your credit report ahead of time to see where you stand. If there are issues that need to be corrected, then take care of them before you apply for the loan. Even if your credit report is fine, it never hurts to check again just to be sure, especially since many financial institutions now offer one free credit report per year.
2. A Verified Source of Income
You need to prove that you can afford the car. The easiest way to do that is to have a verifiable source of income. When applying for an auto loan, your potential lender will likely require documentation such as pay stubs and tax returns.
3. A Low Debt-to-Income Ratio
It may sound simple enough, but before applying for auto financing, you need to know your income and budget. Regardless of whether you’re a salaried employee or self-employed, it’s important to look at all of your monthly expenditures and subtract that from your gross income. You’ll want this number to be as low as possible. If you have a high debt-to-income ratio, the lender will assume that your finances are already stretched thin and may be difficult to repay even a small auto loan.
4. A Verified Residence
It’s pretty obvious why a verifiable address is important—so the lender knows where to send your car. But what you may not know is that some lenders will also request proof of homeownership. This means that you need to own your home before applying for a loan, or else the lender may require that you purchase and occupy the property as collateral. Think about it: If you’re trying to borrow money to buy something, then it makes sense that the lender would want to be sure that you’re actually going to keep it.
A lack of savings is another red flag for potential lenders. You can’t expect to get an auto loan without having some sort of safety net tucked away. Ideally, you should have six months’ worth of living expenses socked away in a high-yield savings account before applying. However, if that isn’t feasible, you’ll at least want to have the bare minimum of $1,000.
6. A Sufficient Down Payment
If you have poor credit, the last thing you want to do is put yourself in a situation where you can’t afford your monthly payments or find yourself upside down in your loan if the value of the car drops. So be prepared for this scenario by having enough money set aside for at least a 20% down-payment.
7. A Stable Work History
If you’re self-employed, then this one applies to you. Many potential lenders will require that your business has existed for at least two years before they consider your application. This is because they want to see that you have a proven track record and can reasonably be expected to pay back your loan.
There are lots of other things you should know before applying for an auto loan, but these seven should top the list. Of course, it’s impossible to guarantee the outcome of every situation, but if you’ve got these things in order, you’ll increase the chances of finding a comfortable deal on financing.