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If you plan to buy a car soon, prepare to spend about $50,000. After all, the average transaction price (ATP) of a new light vehicle in the U.S. was $48,094 in September 2022. Compared to September 2021, that’s $2,775 or 6.1% higher.
So unless you’re rolling in dough, you’ll likely need to apply for a car loan to finance your new vehicle purchase.
Fortunately, applying for an auto loan online is now possible. You may even get pre-approved for a car loan the same day, provided you meet the requirements.
To that end, we created this guide discussing how to go about online auto loan applications. Read on to discover what you need to prepare to increase your chances of getting pre-approved.
Check Your Credit Report and Score First
Once you send your car loan application online, the lender can either pre-approve or deny you. Pre-approval involves reviewing your credit, including your credit report and credit score. If it meets the lender’s requirements, you can get pre-approved.
If not, the lender will deny your vehicle finance application. In this case, you’ve only wasted time and effort.
The thing is, your less-than-stellar credit report or score might not even be your fault. For example, your report may have outdated or even incorrect items listed. Unfortunately, such mistakes are common, affecting 1 in 3 Americans.
So, take the time to pull your report to ensure it doesn’t contain any errors. Besides, you can request copies from the major credit reporting agencies for free. They’re offering weekly copies at no charge until the end of 2023.
Once you have a copy of your credit report, please review all the items to ensure they’re correct. If there are errors, dispute them with the credit reporting bureau.
It can take about 30 to 45 days to correct errors, sometimes less. But since you can request weekly copies, you can recheck the report the following week.
Another reason to check your credit report is that it can lower your credit score. The lower it is, the less likely you can qualify for an auto loan, much less get the best rate. Note that most car loan lenders prefer credit scores of at least 661.
Improve Your Credit Score
If you find out your credit score is below 661, and it’s not due to an error, it may be best not to apply for a loan yet. Instead, consider boosting it first; sometimes, it can take as little as one month.
Remember: The chief factors that make up a credit score are payment history and amounts owed. For FICO scores, the former accounts for 35%, while the latter is 30%. So, these two alone already comprise two-thirds of a score.
You can improve your score by paying down debts, such as a small personal or bank loan. That results in you owing less and having a lower credit utilization rate.
You can also ask your creditors (i.e., credit card issuers) to increase your credit limit. Having a higher but unused credit limit also reduces your utilization rate.
You can achieve those goals in a month, so if you do, have your creditors recalculate your score by month’s end. That can update your score quicker; if it does, you might already see an improvement.
If your improved score is now 661 or higher, you can proceed to the next step.
Decide on a Down Payment Amount
When applying for an auto loan, one of the questions you need to answer is how much your down payment will be. For reference, the average down payment in the first quarter of 2022 reached $6,026. That marks a 27% increase from the same quarter of the previous year.
As a wise borrower, aim to make the highest down payment possible to owe your lender a smaller amount. If possible, put down at least 20%. For example, if the car you want to finance costs $40,000, your down payment should be at least $8,000.
Create Digital Copies of Your Documents
Since you’re applying for a loan online, you need digital or scanned copies of the paperwork. Some lenders may have more requirements, but most ask for the following:
- Proof of identity (driver’s license or passport)
- Proof of income (latest pay stubs or bank statements)
- Proof of residence (bills indicating your home address)
Lenders must also know your social security number to pull your credit report.
If you’re refinancing, you must also provide a copy of your registration and insurance. Most lenders also require an odometer photo. Here’s a guide where you can learn and find out more about refinancing existing auto loans.
Start Applying for an Auto Loan Pre-Approval
Once you’ve done the steps above, it’s time to accomplish the auto loan application online. You must provide your contact details, the required paperwork, and the loan term you want. It takes about 10 minutes to complete.
The lender reviews your application and, if everything is in order, may notify you on the same day. However, some may get back to you after a day or two if they have a heavier loan application load.
If the lender pre-approves you, they’ll tell you how much you can borrow. That’s a perk since it gives you a clearer idea of your car-buying budget. The lender may also offer you a locked-in offer, usually good for 30 days.
The pre-approval also details the loan’s annual percentage rate (APR).
You can confirm the loan application if you find the offer and its conditions agreeable. You can then take the agreement to the nearest participating dealership. The dealer finalizes the contract once you’ve chosen the car you want to drive back home.
Prepare for Your Auto Loan Application ASAP
Remember: Applying for an auto loan will result in a hard credit check, which can cause your credit score to dip. That’s why you’d want your first application to get approved. Otherwise, you’d have wasted your time and also have to deal with the effects of your score taking a hit.
To avoid those potential problems, check your credit report and score first. Then, improve your score if necessary before starting your loan application.
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