Getting your first car loan may seem intimidating, especially for novice car buyers. But it’s not as daunting as it seems. The good news is there are a few things you can do when getting a car loan that can strengthen your finance application.
In this article, we take the guesswork out of car loan approval. Follow these tips so you can push the pedal to the metal sooner!
Check the lender’s loan eligibility criteria
First and foremost, ensure you meet all the lender’s eligibility requirements. Loan requirements can vary depending on the lender and the type of loan. Some lenders have restrictions on minimum income thresholds, sources of income, residency requirements, and employment status.
Find out what type of documents are needed for the loan application, as well. Gathering important documentation like identification, financial statements, proof of income, and the like early can help save time and streamline the application process.
Boost your credit score
A good credit score improves your chances of getting your car loan approved. A high credit score tells lenders that you’re diligent about repaying debt, you make timely bill payments, and you’re generally financially responsible. This gives lenders the impression that you’re at a low risk of default and are more likely to approve your loan with favourable terms.
If your credit score isn’t as high as you’d like, you can improve it by paying bills on time and clearing out outstanding debt. You could also get a copy of your credit report and review your credit history. Check for any discrepancies and contact the credit reporting agency to have errors fixed immediately.
Provide a down payment
Car loans don’t usually require a down payment or deposit. However, providing one could boost your chances of car loan approval. With a deposit, you’re minimising the amount you’re borrowing. The less money borrowed means less risk for the lender. Plus, it shows that you’re able to save and be a financially responsible borrower.
A down payment or deposit has the added benefit of lowering the overall cost of the loan. Since you’re borrowing less money, the amount of interest paid over the life of the car loan could also be lower.
Improve your debt-to-income ratio
The debt-to-income (DTI) ratio pertains to how much of your income goes into paying debt. Lenders use the DTI ratio to assess your borrowing risk. Generally, a DTI ratio of 35% or less is considered good. To a lender, a low DTI ratio indicates that the borrower has enough funds to pay off the new debt if approved for a car loan.
You can improve your DTI ratio by reducing any existing debt. Review your outstanding debt and pay off the largest ones first. Also, avoid acquiring more debt like personal loans or credit cards while applying for a car loan.
Don’t apply for multiple car loans at once
Some may think that applying for multiple car loans could improve their chances of getting approved—this is absolutely not the case! Lenders will see multiple loan applications as a massive red flag. They may think that you’re not serious about your car loan application or are desperate for financing and can’t pay it back.
Loan applications are also recorded on your credit history as it triggers lenders to do a hard inquiry into your credit file. This knocks down your credit score by a few points.
Figure out the right budget
The amount you ask to borrow could affect your chances of approval. Before applying for a car loan, figure out a suitable price range that matches your financial situation. Use online car repayment calculators to help you figure out how much you can comfortably afford. Don’t forget to include additional costs like maintenance, insurance, fuel, registration fees, and stamp duty when to your budget.
Avoid asking lenders for more money than you can afford. Lenders will assess your financial situation including your income, debt, expenses, and other factors. Applying for a car loan that’s above your means could lead to your application being rejected.
Have a guarantor on your car loan
This could be a good idea for those who don’t have limited credit history or poor credit scores. A guarantor will be legally liable for the car loan should you miss payments or default on the loan. This puts lenders more at ease because there’s a guarantee that the loan will be paid back.
Apply for a pre-approved car loan
Obtaining pre-approval for a car loan is a great way to test the waters before lodging a car loan application since it gives you an idea of how much you can spend on a car. Receiving pre-approval means the lender agrees in principle to lend you a sum of money to buy a car, subject to credit approval and an invoice from the dealership. Apply for a pre-approved car loan at CarLoans.com.au. Speak to our expert loan brokers to learn more about your car finance options!