Shopping for a new car is a nerve-wracking experience. Finding a flashy set of wheels at a bargain price is a tall order. And even if you land that dream deal, you can screw it all up by not getting the best financing.
Fortunately, there are many steps you can take to make sure you get the best deal on an auto loan. They include:
Disclaimer: Title, registration, other fees, taxes and incentives are not included in this calculation. This is a monthly auto loan payment estimate provided for informational purposes only; this is not a financial offer.
Estimated Payoff Date:
Check your credit report before you start auto loan process
Your first step in shopping for an auto loan should be to pull your credit report and make sure it is in good shape. Federal law allows you one free annual look at your credit report from each of the three major credit-reporting agencies - Equifax, Experian and TransUnion.
When you apply for an auto loan, the lender will check at least one of your credit reports from the major credit-reporting agencies to see if you are a credit-worthy borrower, says John Ulzheimer, a credit and personal finance expert and president of The Ulzheimer Group.
"It's a good idea to check all three of your credit reports because you won't know which credit report the auto lenders will check," Ulzheimer says.
Go over each report carefully and look for any errors that might depress your credit score. Such mistakes are probably more common than you think. A 2013 Federal Trade Commission report found that 21 percent of Americans surveyed found at least one error in their credit report.
If you find such a mistake, report it to the credit-reporting agency whose credit report you are perusing. Correcting such wrong information can lift your credit score, which in turn will help you get the best auto loan rate.
Compare lenders to get the best auto loan deal
In many cases, it is a mistake to secure financing through your car dealer. "The rate you get on your own may actually be better than the rate the dealership can get you," Ulzheimer says.
So, try to line up financing even before you go car shopping by comparing rates at various types of lenders: large banks, online banks, community banks and credit unions.
Once you have a solid rate lined up, ask the dealership if it can offer an even better rate. There are situations where the dealer rate will be best, Ulzheimer says.
"The exception is if the lender can secure financing for you through the captive lender, which is the lending arm of the auto manufacturer," he says. "Rates from captive lenders are often better than you can get through a bank or credit union."
Make the biggest down payment you can prior to securing a car loan
Scrimping and saving for a down payment is no fun. But all that effort can pay major dividends when you go to secure a car loan.
The larger your down payment, the lower your monthly payment. Plus, you will pay less in interest over time, lowering the overall cost of buying the car.
For example, purchase a $20,000 car with a $4,000 down payment on a 5 percent 48-month loan and you will pay $1,686.56 in interest over the life of the loan.
Double the down payment to $8,000, and you will pay just $1,264.80 in interest. Make a down payment of $12,000, and the total interest paid drops to $843.04.
Choose the shortest car loan term you can afford
In recent years, lenders have been allowing borrowers to stretch out their car loan terms to as long as 96 months - or eight years. On the surface, this is attractive, because it can lower your monthly payment.
But over time, it can be harmful to your wallet. In fact, Ulzheimer says taking out a longer loan is a "terrible idea."
"Drawing out the loan over so many years is an incentive to buy a more expensive car, because the monthly payments are lower," he says. "Don't fall for that trap."
A longer loan will leave you paying more interest for the car. It also puts you at greater risk of being "underwater" on your loan - owing more than the car is worth. That is because cars depreciate quickly.
Instead, Ulzheimer suggests paying cash or taking out a shorter-term loans, such as 36 or 48 months.
Read the fine print on your car loan: Watch for penalties, fees
Do not sign up for any car loan until you understand the fine print. Look for provisions that might not be to your advantage.
For example, some car loans have a prepayment penalty. That means you will have to pony up extra cash if you decide to pay off your loan early.
Also, watch out for fees. Some are relatively straightforward -- sales tax, a documentation fee and registration fees. But you also might see mysterious fees with strange names or acronyms attached to them. Make sure you get an explanation of these fees and be ready to negotiate them.
Don't forget to shop for car insurance as you shop for your car
Finding the vehicles whose auto loan payments you can afford is only part of the equation when buying a car. For the full cost of owning the vehicle, you need also to determine the cost of car insurance. Shopping around for car insurance should be done as you're looking at cars because if the insurance premium turns out to be higher than you assumed, it may price you out of owning the car you had your eye on. You don't want what you believed was an affordable vehicle to be over your budget when you factor in car insurance. Do your due diligence and get at least three car insurance quotes on the vehicle before you sign on the dotted line to purchase it.
Make sure the quotes you receive are for the same coverages and limits so you have a realistic look at what your costs could be. If you determine that you can afford the car insurance plus car payment, then it's time to proceed with the purchase. If the car insurance cost would bust your car budget, it's probably time to look at a different vehicle -- just make sure to check in the car insurance rates on it too.