Apr 16, 2015 / Auto & RV
Most people aren’t what might be called perfect borrowers. Some may still be pulling their credit back from the brink after a job loss. Others may be self-employed, with income that varies a lot. Whatever the reason, not everyone can qualify for those enticing 0% car loans pushed by dealers. But there are reasonable auto loans available to a wide variety of borrowers, as long as you know where to look and how to show yourself in the best light.
Here are some strategies to help you secure financing for a vehicle.
Improving your credit takes time. However, there are a few last-minute things you can do if you’re preparing to apply for a loan. Maxed-out credit cards can bring your score down, so reducing the highest balances may help. Shoot for getting each account balance below 30% of the credit limit. You should also get your credit report from one of the three major reporting companies and make sure there are no errors on it.
If you’re an entrepreneur or a freelancer, your income may not be as steady as that of someone with a regular job. When applying for a loan of any kind, you’ll need to document your income more carefully than other people might. Tax returns, bank records and check stubs reflecting payments you’ve received over the past two years will help you make your case.
It would be nice to own your car free and clear after only 36 months. But that may make the monthly payments prohibitively high, especially if you don’t get the lowest interest rate available. Stretching the loan to 60 months or even longer can help keep payments affordable and may be better for your credit than a short-term loan with higher payments than you can afford. Proceed with caution, though. Cars are depreciating assets, meaning their value falls with use and time. The longer the loan term, the more risk you run of owing more than the car is worth. This can be a problem if you need to sell it before the loan is paid off.
No-money-down loans are harder to qualify for if your credit is less than stellar. A down payment sends a message to the seller that you’re unlikely to default, since you have your own money invested in the car. A larger amount down also reduces the amount you need to borrow, making it easier to keep the payments low even at a relatively high interest rate.
If buying a new car is out of reach, find a late-model used car from a well-regarded dealer. You may even be able to find a good car with a salvage title, which means the car was totaled and then repaired. If you do plan to get financing for this sort of vehicle, though, make sure you bring proof that it can be insured. Not all insurers will deal with salvaged autos, so your lender will want to make sure you can get it covered.
A dealer may be willing to finance your purchase, but a financial institution where you already have a relationship may give you a better deal. Lenders like Utah First Credit Union offer car loans with a variety of terms, and may be more open to an unconventional borrower.
If you don’t fit the mold of the perfect borrower, you may not be able to get your ideal auto loan. But sitting down with your lender can help you find a solution, and you may be enjoying your new wheels before you know it.
Virginia C. McGuire, NerdWallet
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