Car ownership is a significant investment. If you’ve been looking into buying a vehicle, know that there is an affordable way of getting the car you need, and that is through a loan.
A car loan is credit for purchasing a motor vehicle like a car, motorbike, or a van. Even if you have enough savings, getting your car through a loan can be beneficial for a number of reasons. Separate loan payments makes for easier budgeting, there’s more freedom to refinance and upgrade your car at the end of the loan term, being able to borrow more than you’ve saved and thus having more buying power and more importantly you’ll be able to keep your savings for a rainy day.
It works by paying the total amount of the vehicle, along with interest rate and fees, on a set repayment schedule. The lender will give you a timeframe in which you should pay the total amount. The best car loans will allow you to make extra repayments to reduce the overall cost and shorten the term.
It may sound simple, but applying for a car loan can be challenging, especially if you don’t know and understand everything about the process, and being rejected for a loan can be bad for your credit history.
To prevent this from happening, here are four common mistakes you can avoid to assist the approval of your loan application.
1. Understand your credit ratings
The lending institution will look into your credit rating to decide if you are an investment risk or not. A finance broker will be able to do a ‘soft credit check’ when you initially start looking at loans, a soft credit check leaves no mark on your history so you’ll know your credit rating before you apply.
If you have a low credit rating, a finance broker should be able to give guidance on how to improve it (in the long term) but also be able to source lenders who can help your situation. However if you’re applying on your own you must get a copy of your credit report before applying for a car loan.
Once you know your credit score, you or your broker will be in the best position to negotiate the interest rates and loan terms.
Keep in mind if you apply for finance on your own, and your application is rejected, it will have a negative impact on your credit history which can make it more difficult to get a loan later on. If you want to have complete confidence, contact a finance broker first.
2. Providing unclear or incorrect information
It is crucial that you give the right information to the lending company or bank. Everything you enter into your application form, along with your supporting documents, will be used by the lenders to determine if you are capable of making the repayments for the entire duration of the loan.
Even your phone number and address will be verified. So if you have moved to another state, for example, don’t forget to change your address. Any incorrect or unclear information you include in the forms may lead to rejection.
Run through the required forms and documents at least three times, checking if its contents are clear and correct before submitting them.
3. Managing your current debt poorly
Another thing lending institutions look into when applying for a car loan is how you manage your current debt. If, for instance, you have defaulted loans or your credit cards are over the limit, the chances of your loan application getting approved will be reduced.
As much as possible, avoid incurring debts. If this is not possible, you must manage your debt properly. For instance, modify your budget so you can afford to pay more each month. You can also consolidate your debt. This will not just help boost your credit score, but the lending institution will also consider these efforts as a plus.
4. Requesting a large loan
There is a limit to the amount of money you can borrow, and this greatly depends on the price of car you want to purchase and your monthly income.
So before deciding on how much to borrow, you must determine how much you can afford to make payments each month. A car loan calculator is your best tool for determining such.
If a lender offers you more credit than you need, stick with the amount you originally asked for. It will save you owning more money that what your car is worth.
Taking out a loan is indeed an excellent way to get the car you need. But you must be diligent with avoiding these common mistakes to ensure the approval of your application.
Rob Chaloner is the Founder and Managing Director of Stratton, and is passionate about smarter ways to buy and finance cars. With Stratton, he’s working to help Australian buyers disrupt the traditional car buying, financing and insurance markets through smarter products and online services.