Unless you are well off enough to pay cash for your next car purchase, you may need financing. Whether you have perfect credit or have had some credit issues, knowing the appropriate steps to follow will help you secure the best financing.
Driving the car of your dreams usually requires the ability to qualify for a loan. No matter what condition your credit is in, the following steps will help you secure the best financing available.
1. Research, research, research. There are plenty of online services to assist you in finding the car of your dreams, whether new or used. If you are looking at a new car, you might want to start with the manufacturer’s website. Be sure to compare the trim levels and option packages. There are also several auto portals that allow you to research and compare vehicles. Sites like Cars.com, Autotrader.com, and Edmunds.com. Visit several dealership websites. Most advertise their pricing and provide discounts to online buyers. If you are researching a used vehicle, always make sure you are comparing apples to apples. Prices can vary significantly on used vehicles based on trim level, options, mileage and region of the country that the vehicle is being sold in.
2. Know the condition your credit is in before you walk into a car dealership. If you have a perfect credit file, banks will be fighting for your business, but if your credit presents challenges, you should know what those challenges are and whether or not the dealership you plan to purchase from has lending sources to meet your needs. Do not fill out a credit application until you are ready to make the purchase.
3. Know the vehicle you want, but have alternatives handy! You may have your heart set on a brand new Mercedes or BMW, but your budget or credit aligns better with a used Hyundai or Kia. Regardless of your income or credit situation, you may still be able to purchase the car of your dreams, but lenders may require a substantial down payment to allow you to drive off in the car of your choice.
4. Research the going interest rates. Whether you are an 800 or 400 credit score, know the going bank rates for your credit profile. Securing the interest rate your credit deserves could save you hundreds if not thousands of dollars in interest payments.
5. Never tell a dealer the monthly payment you are comfortable paying. Negotiate your purchase based on selling price of the vehicle, not your monthly car payment. If you tell a dealer you are looking for a $350 per month payment, they will in many cases adjust the financing to meet your payment needs. This could mean providing you with extended term financing (i.e.: 72 or 84 month financing), which could cost you plenty of money over the life of the loan. Keep in mind, the longer you extend the term, longer it takes for you to build equity in your vehicle.
6. Know your budget. Most lenders have debt to income and payment to income standards that they adhere to. Those parameters vary, but many will not extend a loan to anyone whose total monthly debt obligations exceed 50% of their gross monthly income. They usually only take into consideration those debts that show up in your credit file or are disclosed on your credit application, including, rent or mortgage payment, installment loans or credit card payments. Utilities, car insurance or any other obligations that do not report to your credit file are not usually taken into consideration. In addition to debt to income (DTI), many lenders have maximum payment to incomes (PTI’s). PTI’s can range from 10% of your gross monthly income to 20% or higher, depending on the lender. If a lenders maximum PTI is 15% and an applicant’s gross monthly income is $3000, that applicant could be considered for a payment as high as $450.
7. Down payment. While lenders do not always require a down payment, your credit profile may require money down. Generally speaking, the more credit issues an applicant has, the more down payment a lender is going to require. Lenders have Loan to Value (LTV) restrictions that they adhere to. LTV is the percentage of the vehicle value that a lender is willing to finance. While some lenders will finance as much as 130% or more of a vehicles value (based on invoice, MSRP or third party information like Black Book or NADA), the LTV is dictated by ones credit profile. The more challenged ones credit profile, the lower the LTV.
8. Document, document, document. Be prepared to prove your income. If you receive a pay stub, be ready to present a recent copy. In some cases, lenders may require W2’s. If you are self-employed, keep good records. Lenders may want two years worth of tax returns. Some lenders may require bank statements, usually 3 consecutive months worth. Deposits should be consistent with stated income. If an applicant claims they make $3,000 per month, then monthly deposit activity should correlate with the stated income. Lenders may also require additional documentation like mortgage statements, credit card statements, utility bills or additional legal documents.
9. Make sure you understand all of the products or services your final contract includes. If you are buying a used vehicle, you may want to consider an extended warranty. You also may want to consider additional products or services. If you choose to purchase any of these add-on products, be aware that they will impact the monthly payment and total loan. The value that these products or services present to an individual will vary, and buyer’s personal needs should be the deciding factor as to whether or not to include these ancillary products with your financing terms.
10. There are a lot of factors to keep in mind when purchasing your next vehicle. While your next purchase may not end up being your ‘dream car’, if you follow many of the steps above, you will be one step closer to driving home the car of your choice. Do your research. Know your credit profile. You may not qualify for your first car choice, so have options. Check with local banks or credit unions to see what the going interest rates are. Don’t make your purchase based on monthly payment; base your purchase on a fair selling price. Budget yourself. Monthly payment may be important, but by financing your loan for a shorter term and paying a higher monthly installment, you will build equity much faster and possibly save thousands in interest charges. Be prepared to make a down payment. Keep good records, you may be required to prove what you state. Examine your personal needs. Do you need additional products or services that the dealership is offering? Now, go out and get the car of your dreams.