Tips for Improving Your Chances of Getting Approved for an Auto Loan
Here are tips to improve your chances of getting approved for an auto loan: check your credit card report, improve your credit, pay down debt, shop for different lenders, establish affordability, extra expenses, and save for a deposit.
The Covid-19 pandemic has created an unfavorable economic climate for creditors and borrowers alike. Today, most customers are careful about their spending, and most fear rejection when applying for a loan – whether a car loan, a house loan, or even a credit card loan.
It's important to note that thousands of people apply for loans annually, but only a handful gets approved. Being denied any loan application can be a frustrating experience for many people; indeed, it can emerge as a negative experience, especially for first-time borrowers who lack experience with auto loans.
There are various factors that a lender takes into account before approving you for an auto loan. These factors include your employment history, income status, down payment, collateral, and debt-to-income ratio.
Some vendors will also look at your liquid assets and long-term loan. So, different creditors have different loaning requirements. And although there are discrepancies in the lending requirements, there are critical factors that will determine whether or not you'll get approved for an auto loan.
Let’s take a closer look.
1. Check your credit card report
It's always advisable to check your credit card report before applying for a car loan. That's because the credit card statement is the first document the lender will inspect before approving your loan.
Your credit card report contains valuable information regarding your financial and credit history, which can give the lender a good evaluation of how well you’re likely to finance the loan in case your application is approved.
The information contained in your credit card report includes:
- Bankruptcies or defaults
- Repayment history
- Recurring expenditures
- Recurring deposits
These factors help the creditor rank and evaluate your creditworthiness, thus helping determine how well you're prepared to finance a car loan.
So, check your credit card history to improve your chances of being approved for an auto loan.
2. Improve your credit
You may want to improve your credit to increase your chances of being approved for an auto loan. If your credit is not incredible, consider it improved at all costs. To do this, ensure that you settle all your debts in time.
Clear any outstanding amounts due and ensure to correct any errors in your credit card history. Apply to have all errors corrected if you notice any anomalies in your credit card history. In addition, make down payments and constantly show a solid effort to grow your credit history.
3. Pay down debt
Debt is one of the biggest inhibitors to securing any loan. That's because anytime you apply for a car loan, your debtor will look at your cash flows relative to your outgoings. And if your debt is high relative to your income, they may easily reject your application.
Pay particular attention to the amounts you owe people and institutions and ensure that you settle any outstanding debts before applying for a car loan. In addition, your debt shouldn't be more than 35% of your total income. Paying down debts is the sure-fire way of getting approved for any auto loan.
4. Shop for different lenders
Applying for an auto loan through more than one creditor may seem tedious and time-consuming. However, it’s well worth it when you consider the rewards.
There are multiple places or locations where someone can apply for an auto loan – banks, financial institutions, car dealerships, credit unions, and online lenders.
And even if you're sure you'll collect your auto financing from a specific creditor, ensure to shop around for better deals. You still have 14-days to change a lending contract without ruining your credit card score.
So, it's advisable to always be keen for lucrative deals from multiple lenders, including banks, microfinance institutions, online lenders, and dealerships.
5. Establish affordability
The first, most important way to improve your chances of being approved for a car loan is to check your affordability. To determine your affordability, find out how much you can comfortably spend on a car.
To do a good evaluation, take your total income and subtract all your taxes, deductions, and monthly expenditure (such as rent, food, insurance, airtime, and subscriptions). All these costs must be deducted from your total income to arrive at a disposable income figure.
The extra credit or extra disposable income is the amount of money you can spend on luxuries, essential credit, and savings like monthly car installments.
So, first debit your basic expenses and essential deductibles, and accurately accounting for your total spending is the best way to improve your chances of being approved for a car loan.
6. The extra expenses are mandatory!
Most borrowers forget that affording a car isn't all about settling the monthly car installments. For instance, if you've calculated that you have $800 to spend on a car after paying all the other expenses (bills, utilities, deductibles, rent, fees), you'll need to ensure the $800 is adequate to finance your monthly car installments, insurance, and fuel.
Comprehensive insurance and fuel are other crucial costs that must be factored into your outgoing monthly expenses. And most importantly, if your car lacks a maintenance plan, you should also set aside a budget to cover regular maintenance.
7. Save for a deposit
If you have demonstrated to your creditor (bank, micro-finance, online lender, etc) that you can budget yourself responsibly, you'll impress them further if you make a down payment or deposit.
And while it's not mandatory to make a down payment, you'll realize that it will work to your advantage in the long term. Making a down payment reduces the total amount of credit required for the transaction, leading to less interest, lower monthly installments, and improved affordability.
By saving for a deposit, your financial responsibility reflects well in your credit profile, ensuring that your application gets approved in time. So, working towards improving your financial integrity by actively improving your credit profile is a sure-fire way of getting approved for an auto loan.
Other tips that you can use to improve your chances of getting approved for an auto loan include:
- Do your thorough research before securing your auto loan. Visit many dealers, inquire from multiple creditors, and know from various sources.
- Aim for shorter terms by looking at affordable options than simply financing an expensive car.
- Pay down big down payments that will save you in the long term.
- Time it right and ensure you wait the right time to purchase a car. For instance, November and December are when most sales persons are looking to close their quotas. Also, aim for early in the week or later in the month.
- Cover fees and taxes. Always try to account for any fees and taxes at the beginning of the loaning process. Ensure you pay fees and taxes in cash to avoid pushing off expensive costs.
- Refinance and save. Ensure that you refinance your existing car loan to save you money.
Refinancing ensures that you earn a better interest rate. You can use auto loan calculators to calculate your refinancing rates.
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myAutoloan allows consumers to compare up to four different car loaning options and determine the right choice for them. And in terms of refinancing, there is no repayment for up to three months for qualified borrowers.