If only we all had our own personal Oprah when it came time to get a new car.
Car ownership is certainly part of the American dream, but for the first-time auto buyer, trying to figure out financing can feel like a bit of a nightmare.
Before you go into a tailspin, relax and let us take the wheel with 10 tips to help you get the best car loan possible.
1) Know how much "gas" you have in your credit tank.
If you go on the DMV website to their section on "How to Get a Car Loan," the top of the page is geared to help you find "a good rate on your new wheels."
It's not hard to spot the top driver of your loan qualification: your credit score.
Loyal followers of this blog know that the stronger your credit score is, the better chance you have at not only being approved for a loan, but also getting a relatively low rate that will save you money on interest. And you'll feel that savings on a monthly basis with lower monthly car payments.
If you're out of touch with your credit scores, you are entitled by law to access them for free from each of the top three credit bureaus (Experian, TransUnion and Equifax) on the AnnualCreditReport.com website.
And if you are a RentTrack user, you're not only on top of using rent payments you'd make anyways to help boost your credit score without incurring more debt, but you also get to see your credit scores from each with a breakdown of all the factors affecting it.
2) Figure out your monthly budget to, as that'll steer you toward the right loan.
You might know exactly what car you want, but you first must be sure your dream mobile doesn't accidentally destroy your monthly budget.
Start with a general budgeting best practice: write down your typical monthly expenses without a new car payment.
Next, figure out exactly how much you have left to spend on a monthly basis with enough room that you don't get in over your head. This will include not just the car payment, but also enough for insurance, fuel (either gas or electricity/charging if you're considering getting a hybrid), registration fees, and maintenance. This gives you a good ballpark estimate for starters.
3) … now, figure out exactly what you can spend on a new car.
Once you have a good idea of what you can spend on your car-related expenses each month, get an even better idea by figuring out the total amount you can afford to spend on a car. Use a car loan calculator to nail down that number. (Try this one from NerdWallet, or check your bank's website, as many have car loan calculators.)
Keep in mind that the longer the period of a loan. the lower your monthly payment will be. Most car loans come in three- to six-year terms. The shortest length of a loan that still meets your budget is your best bet. The longer a loan period stretches on, the more your car will depreciate and the greater the chances are that your car loan will end up being "upside down." (That means that you'll owe more money on the car than it's actually worth.)
4) Get pre-approved for a loan
While you can certainly try to get a loan on the spot at a dealership, it's almost always a better tactic to shop around first to get pre-approved for the best rate possible. Car dealers are most interested in getting you to walk out the door with a new car — not on saving you money by getting you the best rates possible. When you walk into a dealership armed with a pre-approved loan, it makes the whole process a lot quicker and simpler.
Here are a few ideas of where to look for a car loan:
- Comparison shop online: This includes the DMV page we mentioned earlier, which pulls up several sites to consider.
- Your local bank: While the bank you do your other business with may offer you a competitive rate for your loyalty, it's also worthwhile to talk to other banks to see if they can do even better for you.
- Your local credit union: Credit unions are not-for-profit organizations, and they work hard to get the best rates for members.
5) Be speedy about your car loan shopping
While it's smart to compare and contrast car loans, be sure to be quick about it. Credit scoring models penalize you for having too many "hard' inquiries, which happen every time you apply for a new loan. However, you do have a short grace period of two weeks to a month where your credit score won't be significantly affected by car loan comparison shopping. During this window, all your hard inquiries will count as one. Credit bureaus give you that short window so you can figure things out, so they can be sure you're just checking options and not showing risky financial habits by opening a slew of new accounts.
6) Get a co-signer if you don't have established or good credit
While you might possibly be able to get pre-approved for a car loan if you have no or a low credit score, it's smarter to line up a co-signer to help you not only qualify, but also get a more affordable interest rate. Be sure to check out our advice on how to get a co-signer.
7) Don't settle on the sticker price - negotiate!
Once you have all your financial ducks in a row, it's time to go shopping! But don't let the excitement of the moment overwhelm your good sense. Having a loan pre-approval takes the weight of having to negotiate financing off your shoulders, so you can focus on getting the best deal possible on a vehicle. Car dealers have quotas, especially at the end of a month, a quarter, and best of all, the year, so look when you know your dealer is looking to meet his or her numbers.
8) Let the dealer compete for the loan, too.
Car dealers want as much of your business as possible, so it's worth letting her or him try to beat the terms of your pre-approved loan. Don't fall for any tricks, though — as we mentioned before, longer loans do have lower monthly payments, but can end up costing you more over time.
9) If you're buying from an individual, be sure your loan is still valid.
Getting a loan to buy a car from a person, not a dealer, is fine, but you need to first make sure it's not a deal-breaker for the loan you've been pre-approved for. Also, double check the fine print on previously owned car loans; for example, it might restrict you by the age of the car (i.e. no more than five years old) or on the mileage (i.e. no more than 100,000 miles). You also might pay more on the interest rate.
10) Set yourself up for car loan repayment success
Once you've bought the car and the loan has gone through, make sure you don't miss a payment by setting up automatic payments online. Paying your car loan off on time every month is a great way to build your credit score, buf if you're not careful, late or missed payments can drag your score down.
Buying a new car is a very exciting and important step for anyone, and especially when it's your first time. Just be sure to protect yourself, and use these our car loan tips to cross the financial finish line in a blaze of glory!