For many consumers, the process of obtaining an auto loan can be confusing or even frightening. A number of factors play into the decision to approve or to deny these loans. Credit ratings, financial resources and stability of residence and employment are among the most important elements considered by lenders. Here are five key points to keep in mind when applying for an auto loan.
1. First Contact: Some dealerships will request a credit report prior to the test drive. This request is intended to streamline the financing process and, if necessary, to weed out individuals who lack the financial resources to buy the car. In many cases, dealers can make some allowances for credit issues and can offer larger financing amounts to ensure that consumers get the car they really want. Alternatively, consumers can seek financing through banks or credit unions to ensure that they have financing already in place before starting their search for the right car or truck.
2. Credit Scores: Customer credit scores can have a significant impact on the interest rate offered by the dealership and the availability of financing. Higher credit scores typically result in reduced interest rates; however, the customer’s overall financial resources and ability to pay will generally dictate the size of the loan. The credit checks run by auto dealerships are considered hard inquiries and can slightly lower credit scores for consumers. Multiple inquiries from several different dealerships within the same two-week period, however, are usually grouped together to minimize the effect on the consumer’s overall credit scores.
3. Paying Cash: Even if the buyer intends to pay in cash, the dealership may still request permission to pull a credit report. If the cash transaction exceeds $10,000, for instance, the dealership is required to obtain the buyer’s Social Security number; however, the dealership is not required to run a credit report. Credit reports can only be run by the dealer with the permission of the buyer. Some dealerships, however, may ask for a credit report before accepting a personal check for the purchase of a car or truck.
4. Personal Information: Consumers who are seeking financing through the dealership can take steps to reduce the chance of identity theft by allowing credit checks only when they have found a vehicle they wish to buy. While most dealerships take care to protect consumer information, minimizing the number of applications can significantly reduce the risk of unauthorized access to personal and financial data.
5. Being Proactive: Most consumers can benefit by checking their own credit scores prior to their trip to the dealership. By identifying any errors or problem areas and addressing them with the credit agencies, prospective car buyers can avoid any unpleasant surprises on the car lot and can ensure that they will qualify for financing.
Understanding the auto loan process can help buyers make better choices and can ensure realistic expectations when working with a dealership. A little advance preparation can potentially save consumers hundreds or thousands of dollars in interest over the life of their auto loan.