Take out a second car loan? Here’s what you need to know
It is relatively simple to finance a car. But if you already have an existing loan and are looking to buy another car, getting a second loan can be a bit more difficult. You must have a good or excellent credit score, usually 670 or higher, to qualify for a lower interest rate. You will also need a sufficient amount of stable income to cover the monthly payment of the two car loans.
What to prepare for when taking out a second car loan
Even if you plan to sell your current car privately once you get a second vehicle, you might face roadblocks when applying. Also, insurance costs may be higher and other lenders or creditors may deny you credit after you take out the second loan.
Increased control from lenders
Lenders assess your creditworthiness, current debt, payment history and income to determine if you are a good candidate for an auto loan. You will also be asked to provide detailed information about the vehicle so they can determine if the selling price is reasonable or above the value of the car.
There’s even more control when you take out a second car loan. As you try to add more debt to your plate, the lender needs reassurance that you can afford to make timely monthly payments. But if you have a lower credit score or your debt load is high relative to your income, you may be denied funding.
Additional insurance costs
Your car insurance premiums will increase when you add a second car to your policy. However, the process is relatively simple and shouldn’t take you long. Make sure you have the vehicle identification number (VIN), year, make, model, and license plate number ready when you call the insurance company.
Some providers also offer discounts to customers who insure two or more vehicles on the same policy. This is called a multi-car discount, and you will need to register and park all your cars at the same address to benefit from it.
Difficulty finding credit after getting the loan
Creditors and lenders assess your creditworthiness when you apply for debt products. A higher score means you have less credit risk and could get approved for a credit card or loan product with favorable terms. But a low score could lead to a refusal or a higher interest rate. Unfortunately, your credit score can be temporarily affected when you take out a second car loan, making it difficult to get additional short-term credit.
Each time you apply for funding, an in-depth survey is generated. This could cause a temporary decrease in your credit score. However, you won’t be knocked out for every hard draw if you shop for an auto loan within a specific time frame since FICO consolidates all the hard demands into one application.
Your debt will also increase after financing a second car. Since your credit utilization rate is 30% of your credit score, your score will likely go down. However, it might bounce back after a few months of timely payments to the lender, as payment history is the most important element of the FICO scoring formula.
How to increase your chances of getting a second car loan
Here’s how to increase your chances of approval if you’re looking to finance another car:
- Dispute credit report errors. Visit AnnualCreditReport.com to obtain a copy of your credit report from the three major credit bureaus – Experian, TransUnion and Equifax. Review each page and circle any errors you notice. Once you’ve looked at all three, file disputes with the appropriate credit reporting agency promptly, as inaccurate information could lower your credit score.
- Pay off revolving debt. Ideally, you should have a stable source of income that is more than enough to cover your monthly payments. Payments for installment loans are set in stone, but you can get a lower minimum payment on your credit cards and improve your debt-to-income ratio by paying off balances.
The bottom line
It’s possible to get a second car loan, and there are steps you can take to help you get a good deal. Get a copy of your credit report, check your score to see where you stand, and consider paying off your revolving debt if your debt-to-income ratio is high. Ultimately, you want to prove to the lender that you’re a good credit risk and deserve to be approved for a second car loan at a competitive interest rate.