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How Do Auto Loans Work from the Bank?

Getting an auto loan from a bank is fairly easy, but the inner workings of the process can be a bit mysterious. This leads some new borrowers to wonder how do auto loans work from the bank? To unveil the mystique of auto loans, here are a few things you should know.

Criteria for Bank Auto Loans

Every bank uses its own formula to determine who qualifies for an auto loan, but the following guidelines are commonly used:

  • Loan to value (LTV)…between 85 and 130 percent.
  • Age of vehicle…no more than 7.5 years old.
  • Term of loan…36 to 72 months.
  • Miles on vehicle…under 75,000 or 100,000
  • Down payment…at least 10 percent or $1,000.
  • Time on job…minimum of two years or two years within the same employment category.
  • Time at residence…again, two years.
  • Monthly income before taxes…usually a minimum of $1,400-$1,500, but some lenders will accept $1,250.
  • Credit score/profile…540 or above. A bank’s best case scenario is the you will have four paid lines of credit as agreed, one being an installment loan with twelve on-time payments of $150 or more. Exceptions are made for first time buyers.
  • Total debt to income (DTI) including new payment…preferably less than 36 percent, but some specialty lenders may stretch that to 45 percent.

The Application Process

During the application process you will be asked to verify your income and show proof of identification and residence. If approved, you will need to show proof of insurance on the vehicle before the loan will get final approval.

Every time you apply for a car loan the lender will make a hard inquiry from at least one credit reporting agency. This hard inquiry will lower your credit score by a minimum of 5 points. Your credit report will determine the amount of the down payment that you will be required to offer. Someone with excellent credit may not need a down payment at all, where someone with a low credit score may need to have twenty percent of the total purchase price as a down payment.

The “Blank Check”

If you have not yet chosen your vehicle, the bank may give you a “blank check”–in reality, a confirmation letter pre-approving you for a certain amount. You will take this to the dealership and give it to your dealer salesperson. Typically, you’ll have 30 days to find a vehicle and complete the transaction. Alternatively, if you already have the vehicle selected, you will need the following:

  • The estimated value of vehicle being financed.
  • The vehicle VIN, year, make, model, etc.

Once you have been approved for the auto loan and all of the paperwork is signed, you need to be aware that the car has a lien against it. That allows the lender to repossess the vehicle if you do not repay the loan responsibly.

Dealer vs Bank Financing

In most cases, if the dealer arranges your financing, your actual lender will be a bank, credit union, or finance company. You may be charged slightly more if you go through the dealer, given that the dealer typically gets a cut for arranging your loan, but if your credit score isn’t great, this may be a small price to pay for approval. Alternatively, you can utilize a service like ours to get approved. When you apply online, we will place your application with a dealer or lender willing to pre-approve your credit. A finance specialist will guide you through the process.

There are no fees for online applications, and no obligations to accept the loan you’re offered.