How to Secure an Auto Loan: A Comprehensive Guide

Millions of Americans purchase cars every year, and a significant number of these buyers rely on auto loans to finance their purchases. According to Experian’s State of the Automotive Finance Market report, nearly 80% of new vehicles bought in the first quarter of 2023 were financed. This statistic underscores the importance of access to lending for many prospective car buyers. However, qualifying for an auto loan can sometimes be challenging, especially if you have a high amount of debt or if your credit score needs improvement.

If you’re struggling to get approved for an auto loan, don’t lose hope. Here are six actionable steps to help you secure a car loan and get behind the wheel of your dream vehicle.

Boost Your Credit Score

If you don’t need a new car immediately, consider taking some time to improve your credit score. While an excellent credit score isn’t a prerequisite for obtaining an auto loan, having a FICO® Score in the “good” range (670 to 739) can significantly enhance your chances of securing favorable loan terms. A higher credit score can further improve your approval odds and the terms you’ll receive on the loan.

Here are some strategies to increase your credit score:

• Reduce credit card balances
• Avoid late payments
• Catch up on past-due accounts
• Avoid new credit applications

Additionally, review your credit report for any mistakenly reported late payments or indications of fraud that may be negatively impacting your score. If you find inaccuracies, you have the right to dispute them with the appropriate credit reporting agency.

Explore Your Financing Options

Some types of car loans may be easier to obtain than others. Here are three options that might work if you’re having trouble qualifying for a car loan:

Captive Financing

Many automakers offer captive financing through their lending arms, meaning you’ll make loan payments directly to them rather than to a bank, credit union, or other lender. In some cases, a car loan from an automaker may be easier to obtain because the automaker is motivated to sell you one of their cars rather than a competitor’s vehicle.

Dealer-Arranged Financing

With dealer-arranged financing, a car dealership reaches out to several lenders on your behalf to provide a range of lending options. You can then choose the option that best suits your needs. These options may include lenders willing to extend credit to applicants with less-than-ideal credit histories. However, be aware that dealers often add a little interest on top to make the loan worthwhile for them.

Work With Your Current Bank or Credit Union

Your existing financial institution may be able to originate a loan for a new or used car. Apply for loan preapproval before heading to the dealership so you’ll have an idea of your loan terms and the amount you may be approved for. Once you find a car you like, you’ll provide vehicle information to your bank. Speak with a customer service agent at your bank or credit union to understand the process better.

Consider Leasing a Car

If your credit needs improvement, leasing a car might be an alternative to an auto loan. While low credit can make it challenging to qualify for a lease, credit score requirements vary from dealership to dealership. If you do qualify, low credit may limit your leasing options, such as restricting you to cars within a certain price range, charging a higher interest rate, and requiring a larger down payment. However, leasing can offer lower monthly payments and help keep maintenance and repair costs down.

Decrease Your Debt

Reducing your debt can improve your chances of obtaining a car loan, although it isn’t a quick fix. Lenders generally prefer a debt-to-income ratio (DTI) no higher than 46%, with an ideal DTI of 35% or less. A DTI of 50% or higher may signal to lenders that you won’t be able to accommodate a car payment in your budget.

To calculate your DTI, divide your monthly debt payments by your monthly gross income. For example, if your monthly debt obligations are $1,500 for a mortgage, $500 for a car loan, and $750 for credit card bills, your total monthly debt payments are $2,750. If your monthly gross income is $6,500, your DTI is 42% (2,750/6,500 = 0.42, then multiply by 100).

If your DTI is higher than desired, consider:

• Paying more toward monthly credit card payments
• Avoiding additional debt
• Finding ways to increase your income, such as taking on a side gig

Buy a Used Car

In 2022, the average balance for a car loan was $22,612, according to Experian data. For some buyers, this amount of debt might be a deal-breaker. However, you may be able to secure a loan by opting for a less expensive car. For instance, consider buying a used car instead of a new one. In the first quarter of 2023, the average amount financed for a new car was $40,851, while the average amount financed for a used car was $26,420. The average new car loan balance is 54% higher than the average used car loan balance.

Find a Cosigner

If you’re struggling to qualify for a car loan, consider asking someone to cosign the loan for you. A cosigner with a solid credit record can give a lender more confidence that timely loan payments will be made. However, remember that a cosigner assumes responsibility for making payments or even paying off the loan if you, the primary borrower, fail to do so. Both your credit history and the cosigner’s credit history can be negatively affected if loan payments are missed.

The Bottom Line

Finding it hard to secure a car loan doesn’t mean the end of your car-buying journey. Several options, such as boosting your credit score or finding a cosigner, can help you get back on track. For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. Our team of experts is here to assist you in navigating the complexities of auto loans and ensuring you drive away in the car of your dreams.