Car Loan Essentials & Requirements

If you are in the market for a new car, most likely you will finance one. After all, few people can come up with the funds necessary for an all-cash deal. Financing, though, is fairly straightforward. This means there are common requirements for most loans. Read on and we will look at the car loan essentials.


auto loan


Financing Through Your Bank, Credit Union, or Dealership

When financing a new or used car, consumers have a choice of two financial institutions: a bank or a credit union. Another option is to go through the dealership as the manufacturer’s lending arm offers loans. All three offer solid choices for consumers, especially those with good credit.

Good credit, however, is not easily defined. Some lenders require a score of at least 700 with no outstanding write-offs or bankruptcies. Others go a bit lower, accepting a score in the 650 to 660 neighborhood. Lower scores, typically below 600, and most definitely below 580 typically are considered bad credit car loans. They come with more rigorous financing requirements and higher interest rates.

Required Documentation

To apply for a car loan, certain documentation is required by financial institutions and dealers alike. Having these documents ready before you visit the dealership will save you time.

Valid driver’s license

A current driver’s license is required to purchase a vehicle. Be prepared for your lender to run a report to determine if you have been in an accident or have points. That will not necessarily disqualify you from buying a car, but it can affect your interest rate.

Federal and state tax returns for the past two, sometimes three years

Of course, if you have never filed before, then other documentation will have to do.

Current paystubs

You will need to produce physical paystubs for the last month or more. Typically, lenders want at least two pay periods, sometimes more if your pay is inconsistent. If you use direct deposit, you have paystub documentation forwarded electronically. A simple pay period total will not do…lenders want to see a complete breakdown.

Where do you live?

If you live with your parents, then proof of residency may be hard to come by. Still, if you receive a personal bill, such as for your smartphone or car insurance, then that should do it.

Your current insurer

Likely, you already have a ride and are insured. In this case, the current insurance declaration should suffice. If you are on your parent’s policy, bring a copy anyway.

Money down or a trade-in

Rare is the offer where you can purchase a car and receive a loan without some upfront money of your own. This is called the down payment. Your lender will explain how much is required. Typically, you will need at least 5 percent, sometimes 10 to 20 percent is necessary. Know that the more money you have down the more likely you will receive a favorable interest rate. Also, loan terms are usually shorter and your overall costs lower.

What if you do not have much money to put down? A trade-in may do. Lenders treat a trade as cash, assigning value to the vehicle and subtracting those funds from your purchase price. You can check your car’s value through Kelley Blue Book or the Black Book to determine your car’s worth. Agree upon a value and those funds will offset your loan costs. Do not forget to supply the title to your car. If there is a lien on it, you will need to pay it off first.

Auto Loan Considerations

Securing an auto loan can get you behind the wheel of a new or used ride. If you qualify for a loan, you stand to receive the prevailing good credit interest rate. However, do not give up if your credit is poor – some lenders specialize in bad credit car loans and may be able to help you despite your troubles.


See AlsoHow to Refinance Your Auto Loan

Author: Matthew Keegan
Matt Keegan is a journalist, media professional, and owner of this website. He has an extensive writing background and has covered the automotive sector continuously since 2004. When not driving and evaluating new vehicles, Matt enjoys spending his time outdoors.

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