If you’re interested in applying for a vehicle loan there are a few
things you should know. The first step in the process is deciding your
affordable monthly payment. Deciding your affordable monthly payment
serves two purposes; it starts by helping determine what you can afford to
spend monthly on vehicle (when deciding don’t forget to take into account
insurance, maintenance, and fuel costs) and then helps to determine how
much you can spend on one.
The second step is to determine how you will finance your vehicle.
You can finance through the dealer or your own financial institution. Most
individuals opt to finance through their bank or credit union. This is because
most financial institutions offer better interest rates. Most dealers offer what
is known as “teaser” rates such as 0% interest financing for five years to
attract potential buyers. The problem with teaser rates is most people don’t
qualify for them. Normally they require purchase of a new car, a high credit
rating, and forfeiture of any rebates. For more information on zero percent
financing please see my other articles.
The third step is the application process. When applying for any type
of loan lenders look at several factors. Those factors are Debt to income
ration or DTI, Length of employment or LOE, length of credit history,
repayment history, and overall credit handling. Most lenders will require at
least two years job history (preferably at the same job). Your DTI also
should not exceed 40% of your gross income (before tax income). Your
length of credit, repayment, and overall credit handling history should
reflect positive payments and established accounts (accounts at least two
years or older). If there are negative items on your credit bureau, make sure
to explain the cause of these to the loan officer. This can increase your
chances of approval. Most underwriters will not hold circumstances beyond
your control against you. For instance if you have three late payments on
your credit card, you want to explain the circumstances behind why it
happened such as death in the family, loss of income or job, etc. Doing this
let’s the underwriter know that you did not intentionally miss payments (for
more information on loan decisions, please see my other articles).
There are several items you can bring with you that will help
with the application process. If you are not self employed you will want to
bring in your two most recent pay stubs, proof of any paid collection items
or loan payoffs, and the amount you are looking to borrow. If you are a self-
employed borrower you will need to have two years personal & business tax
returns as well as a current years profit and loss statement in addition to
proof of any paid collection items or loan payoffs, and the amount you are
looking to borrow.
Now that you have been approved and know how much you have to
spend you can move onto the last step in the process which is selecting a
vehicle. Most lenders will require a buyers order (dealer) or bill of sale
(private sale) showing the cost of the vehicle being sold before issuing a
check. Before selecting a car make sure to do your research. When shopping
for a vehicle you want to know how much the vehicle you are intending to
purchase is worth. You can find online price guides and search them for free.
The benefit to doing this is so that you don’t overpay for a vehicle. Some
dealers price their vehicles right at retail value and by the time you are ready
to purchase you are over the retail price resulting in negative equity which is
something you don’t want. Following these simple steps can help put you in
the driver’s seat of your next vehicle.