Getting an Online Auto Loan - What to Consider

Pre-qualifying for an online auto loan gives you the chance to see how much car you can realistically afford. It also puts you in a stronger negotiating position because you know your bottom line before you go shopping. 

Even if you have a less than stellar credit history, you may still qualify for financing if you apply through a company that specializes in auto loans for poor credit (1).  Before you apply for a car loan online, use the following information to help save you time and hassle. 

Determine How Much You Can Afford

It's easy to have champagne tastes on a beer budget, but you need to be realistic about how much you can afford. The higher the vehicle price, the more you will pay per month. As a rule of thumb, it's a good idea to keep your car payments less than 10% of your take-home pay (2). 

To make sure you can afford the payments, figure out your budget first, including all of your income and expenses. Some loan applications will ask for your monthly income and some for your yearly income. Have this information handy before you ever get started. 

It's also important to know how much you are paying for your rent or mortgage, credit card payments, and other loan payments. Generally, you want your debt to income ratio to be less than 50%. Lenders use these figures to determine how big of a payment that you can realistically handle.

Another thing to consider is just how much of a loan you would qualify for. Luckily, many online auto lenders offer the ability to calculate how much you will qualify for given your income and credit standing. Generally, the lower your credit score, the more you will end up paying in interest and the more you may have to pay for a down payment.

Getting pre-qualified can also help you when it comes time to actually shop for a car. You'll know exactly what your bottom line is so you don't get suckered into buying a more expensive vehicle than you can afford. When determining your bottom line, remember that you'll also owe tax, title, license, and document fees when it comes time to buy a vehicle. This generally accounts for about 10% of the purchase price, so be sure to deduct that from your car-shopping budget.

Pros and Cons of Online Auto Loans

Applying for a car loan online is definitely easy, but it may not always be the best way to finance your next vehicle. Below are some pros and cons to keep in mind before you commit to this type of loan.

Pros:

  • Convenience - You don't even need to leave the house to find out if you qualify for a loan and for how much. 
  • Competitive interest rates - If you have a good credit score, some online lenders can offer better interest rates than the car dealership. 
  • Response to the loan process is fast - You may find out if you're approved the same day.
  • The ability to compare lenders - Using a service that brings back results from multiple lenders lets you compare interest rates, fees, and terms to find the best deal for you.
  • You don't need specific vehicle information to pre-qualify for a loan. This makes shopping for a vehicle easier because you now how much you can borrow.

Cons:

  • You may qualify for better interest rates by getting a loan from a local bank or credit union where you are already a customer.
  • Getting pre-approved for an online auto loan may result in a hard-inquiry on your credit report. This can temporarily lower your credit score.
  • Some lenders have a minimum credit score requirement, so you may not qualify for as many loans if you have poor credit.
  • Some lenders only finance new car purchases. Those that offer loans for used cars often have restrictions on the age and mileage of the vehicle.
  • You probably won't qualify for special deals such as cash rebates or no interest for a certain number of month if you finance through an online auto loan. Car manufactures offer these perks as an incentive for customers to finance through the dealership.
  • Customer service may be limited - It may be hard to speak with a lender over the phone and there may not be a physical location for the lender in your area. Be sure to check the company's reputation through Yelp or the BBB before you sign on the dotted line.

The Online Car Loan Process 

Now that you have all the information you need, you can start the online auto loan process. A good place to start is with BankRate.com. They offer an easy search process that lets you select lenders in your area according to the finance period you choose.

The best part is they will give you an estimated interest rate, any special fees and conditions, and the phone number for the lender. The site also has a calculator that will let you estimate possible monthly payments, research tools to help you compare vehicles, buying guides, and more.

You can fill out the loan application online, but don't rush through the process. After gathering all your information, it's just a matter of answering the questions and filling in blanks. Make sure that you fill it out completely and double-check your answers. If everything is correct, you can submit your application and wait for a response. Luckily, most auto lenders reply within a short period of time. 

Once you decide on a vehicle to buy, be aware you will probably need to provide extra documentation to the lender, either through the mail, by fax, or by email. If you are approved for financing, you may need to submit the purchase agreement, registration, and title to the lender. Most lenders also require proof that the vehicle is insured. 

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