Know your credit score

Your credit score will play a key role in the rate you’ll pay for your loan. While that may sound obvious to someone who has applied for one of these loans before, if you are a first-time car buyer, you may not realize how important your credit score is when it comes to getting a loan. A high credit score can help you get a low car loan rate, which in turn saves you money on interest.

Your credit score is based on the information in your credit reports, so to make sure that your credit score is accurate it’s a good idea to also get your credit reports. You can check them for free once a year.

It’s also a good idea to get your free credit score to see where you stand. Just understand that you probably won’t see the same credit score the auto lender will see. There are many different credit scores available, and auto lenders typically use scores customized for auto lenders.

Get Pre-Approved

You don’t have to limit yourself to the financial institution where you do your banking, and it’s fine to check with a few different sources. You want to see what kind of loan, and for what amount, they can offer. Whichever one offers you the best deal, that’s the one you can get financing through.

If you qualify for a loan, you’ll get a “pre-approval” that will be good for a certain period of time and up to a certain amount of money. It’s sort of like having a blank check to buy your vehicle. You can always spend less than the amount for which you are pre-approved, but you can’t spend more, unless you want to make up the difference in cash or by trading in your current vehicle. If you do buy a vehicle for less than the amount for which you have been pre-approved you won’t get the difference back in cash; you’ll just get a smaller loan.

Don’t have great credit? You may still be able to get pre-approved for a car loan with bad credit, but your interest rate will be higher. If you have no credit history, you can either ask someone to co-sign or consider a lender that will work with borrowers with no credit.

Try to do all your car loan shopping within a 14-day period. That’s because some credit scoring models will penalize you if there are too many inquiries into your credit history. But none of them will do so if those inquiries are within a two-week window.

Shop around for the best rate.

You shop around to get a good deal on your new vehicle, so why wouldn’t you shop around for the loan to pay for it? Most people don’t. They go to the dealer without doing any homework.

“That just means you have a target painted on your back,” said Liz Weston, personal finance columnist and author of the book, “Deal with Your Debt.” “Bad things are going to happen to you when you haven’t done your research and you don’t have your loan lined up before you start shopping for a car.”

Eight out of 10 car buyers finance at the dealership, according to the nonprofit Center for Responsible Lending. Maybe it’s the convenience or the lure of ads that offer incredibly low-interest rates. Just remember, those super-low rates are only for customers with excellent credit scores.

Credit unions and community banks are the best place to start. They typically offer the best rates on car loans. “A lot of people just assume they’re getting the best rate and terms from the dealer, and that’s the last assumption you should make,” Weston said. “You can apply for that loan, have it all set up, and then pull the plug at the last minute, if the dealer’s offer is better.”

Pick your payments                                                  

Your job here is to figure out how much you can realistically afford to spend each month on a car payment without straining your budget. Once you know that amount, you can plug it into a car loan calculator to find out the total you can afford to spend.

Car loans typically come in 3-, 4-, 5- and 6-year terms. The longer the term of the loan, the lower the monthly payment. But a longer car loan also means you are likely to be “upside down” for a longer period of time. To be upside down (or “underwater”) on a loan means you owe more than the vehicle is worth.

Don’t forget to factor in insurance and maintenance costs. While those won’t be included in your monthly payment, you’ll have to come up with those funds as well. If you have trouble paying them, you may find it hard to keep up with your car payment, so you want to make sure you are prepared for the total cost. An insurance agent can help you estimate the cost of insuring the types of vehicles you are considering buying.

Don’t get hung-up on the monthly payment.

A lot of people assume that if they can afford the monthly payment, they got a good deal on the car. “That’s a huge mistake,” said Jack Gillis, author of “The Car Book 2014.” Buying a new car typically involves three different negotiations. There’s the price of the vehicle, the value of your trade-in and the financing. And they need to be kept separate. “If you just look at the monthly payment, you’ll have no idea what you’re being charged for the car, you won’t really know what you’re getting for your old vehicle and you won’t know what the interest rate really is,” Gillis warned. “The artificially low monthly payment will disguise the fact that you’re paying more than you should for the car and financing and getting less than you could for your trade-in.” The salesperson will probably ask how much you can afford to pay each month – they’re trained to do that. Gillis says there’s no need to answer.

Keep in mind: If you are pre-approved for the loan before you head to the dealership, you can concentrate on haggling for the lowest price for the car and highest amount for your trade-in without the added pressure of negotiating the interest rate and other details of your loan.

Finalize the Paperwork                                

Once you’ve chosen your vehicle and negotiated the price, the auto dealer’s financing department will coordinate with the lender to finalize the sale. They will very likely try to get you to buy add-ons, such as an extended warranty, VIN etching, paint or fabric protection etc. Be sure to research these ahead of time so you don’t feel pressured into making an uninformed decision.

If you buy a used car from a private party, your lender should walk you through the process of finalizing the sale.

Beware of the yo-yo finance scam. 

You sign all the paperwork, get the keys to your shiny new car and drive it home, assuming the deal is done. A few days or weeks later, someone from the dealership calls and says they were unable to get the financing approved at the agreed-upon price.

You must return the car to the dealership, they say, or negotiate a new loan at a higher interest rate. If you don’t, you could lose your deposit and trade-in, and you may even be charged a rental fee for the time you had the vehicle. Faced with this situation, most people cave.

How can they do this? Most dealers, don’t consider the sale final until the money is in their account and that could be anywhere from a few hours to a couple of days. Chances are this was disclosed somewhere in all the paperwork you signed in the dealer’s financing office. “The only way to protect yourself is to either get your financing elsewhere or tell the dealer that you’re not going to take the car until the financing is deemed final,” Kulka said. The trade association for automobile dealers said: “The National Automobile Dealers Association is not aware of any credible evidence which indicates that fraudulent ‘yo-yo’ transactions are prevalent in today’s marketplace and none was presented to the Federal Trade Commission when it thoroughly examined this issue during a series of motor vehicle roundtables in 2011.”

Start Paying Your Car Loan                 

After the sale is finalized, you will get information about the payment schedule for your loan. Most lenders will send a coupon book you can use for mailing in your payments, along with information on how to access your account online. Even if you plan to pay your loan by mail or at a local branch of your financial institution, it’s a good idea to sign up for the online service so you can check your balance and payments if you need to, and so you’ll be able to make payments online if you are traveling, for example.

Almost every car loan allows you to prepay without a penalty, so if you decide to pay off your loan faster you can do that. Just be sure to check with your lender to make sure your additional payments are processed correctly.