There’s never been a worse time to buy a car. List prices are still inflated well above pre-pandemic levels, and anyone who locks in a loan is locking in a high interest rate—leading to larger car payments and higher overall costs in the long run.
But that’s if you even manage to secure a loan in the first place. In June, the rejection rate for auto loans climbed to 14.2%, up from 9.1% in February, per the Federal Reserve. Luckily, there are certain steps you can take to not only get approved for an auto loan, but also secure the best loan option for you. Here are tips to improve your chances of getting a car loan right now.
Prepare your documentation
To get pre-approved for a car loan, you’ll need to provide proof of identity, income, employment, and your credit history. Gather documents like your driver’s license, recent pay stubs, W-2 forms and credit reports from the three major bureaus. Having these ready will speed up the application process.
Boost your credit score
Your credit score plays a major role in determining your interest rate and whether you’ll get approved. Before applying for a loan, check your credit score so you know where you stand. If it’s low, here are ways to boost it.
Shop for pre-approval from lenders before going to the dealership. Online lenders like banks and credit unions can often pre-approve you quicker than dealers. Pre-approval also shows the dealer you’re a serious buyer and can strengthen your negotiating position.
Make a sizeable down payment
Lenders are more likely to approve buyers who put down 20% or more on their purchase. A larger down payment also leads to better interest rates. If you don’t have enough savings, consider putting less money down initially and refinancing later.
Shop around with multiple lenders
Do your research! Each lender has its own qualifying criteria, rates, and terms. Submit applications with several lenders, including local banks, credit unions, and online lenders. Comparing loan offers will help you find the best deal. Even small differences can save thousands over the life of the loan.
Shoot for a shorter loan term
Opt for a three- to four-year loan, if you can manage the higher payments. This prevents getting stuck paying interest on a deflating asset for close to a decade. Your monthly payment will be higher, but you’ll pay less overall. It also shows the lender you can handle larger payments.
Consider a co-signer
If your credit is limited, adding a co-signer with good credit can improve your chances and get you better terms. Make sure the co-signer understands they’ll be equally liable for repaying the loan.
Similarly, applying for a joint loan with another person who has good credit can help those with limited credit get approved and secure better terms. You become co-borrowers and share responsibility for the loan.
Of course, if at all possible, it’s best to avoid loans altogether. After all, the gold standard for buying a car is paying in cash and in full.